Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

One can be retired and not financially independent or vice versa

Posted By |
MattArdrey
Matthew Ardrey, T.E. Wealth

By Jonathan Chevreau

The headline on today’s blog so perfectly sums up the subtle difference between “Retirement” and “Financial Independence” (aka “Findependence”) that I felt compelled to devote a whole blog to the idea.

It was used in a guest post that began this week via certified financial planner Matthew Ardrey.

Foundation is a paid-for home

Ardrey, who is with T.E. Wealth, seems to view the topic of Financial Independence just as we do on these sites, even down to the basic principle repeated often in the book to which our sister site (FindependenceDay.com) is devoted. In Findependence Day, one of the two financial planning characters, Theo, tells his young clients more than once: “The foundation of Financial Independence is a paid-for home.”

Here’s what Ardrey tells clients just starting down the road to Financial Independence:

I’m often asked how one can get to this wonderful nirvana known as financial independence. The first step is to pay off your home. By having a debt-free residence, you have eliminated what is most people’s largest single expense. Without this hanging over your head, you have freed up significant cash-flow.

Even Ardrey mistook FI for Retirement early on

Ardrey and I have followed each other on Twitter for some time. Ardrey posts as @MattArdreyCFP. But it was only recently, in response to something on one of these sites, that Ardrey casually dropped the fact that he’s been preaching Financial Independence (as opposed to traditional Retirement) to his clients since he entered the financial planning business at the turn of the century.

He noted that the financial planning software used at the financial firm where he got his start did not have a retirement calculator. Instead it had an an analysis tool on “Financial Independence Needs.” At the time, being new to the business, Ardrey thought it was just a fancy way of referring to retirement planning but as the years progressed, “I would soon discover that financial independence was something else entirely.”

So, to return to the headline today, what exactly IS the difference? Here’s the key passage:

Retirement, by definition, is the cessation of work with the intent of not returning. Financial independence, on the other hand, is having sufficient financial assets to have the choice about whether or not you continue to work. So, one can be retired and not financially independent or vice versa.

It’s all about Freedom of Choice

This is of course pretty much what I’ve been saying, or at least the characters in the book and ebooks: “When you’re financially independent, you work because you want to, not because you have to (financially speaking).” And that’s exactly what Aubrey tell his clients:

The main differentiator is freedom of choice. If you are not financially independent, you have no choice but to continue working if you don’t want to alter other aspects of your life. Once you are financially independent, you can choose if you want to continue to work in the same capacity – or at all. This freedom to choose is empowering and it’s what I encourage all of my clients to work towards.

Some real examples

So far in this blog, I’ve reiterated Ardrey’s views. I want to close with some examples closer to home. I can think of a few friends or family members who are “retired, but not financially independent.” One couple in particular comes to mind: they do not work and live entirely on government largesse: some combination of CPP, OAS and GIS. Once upon a time they owned a home , a cottage and a car but today they rent a small apartment above a store. They have time freedom, yes, but no financial freedom. They depend entirely on the one source of income from the Government and if that dried up, I don’t know what they would do. Even with it, they are severely constrained in what they can do. So they are indeed “retired, but not financially independent.”

For the opposite situation, I need look only in the mirror. My wife and I choose to continue to work, and keep deferring future income sources that could be taken now if we chose: employer pensions, CPP, drawdowns from registered and non-registered investments, etc. Our home was paid for early in the 1990s, our cars are paid for and we have no debt. We are in fact financially independent but NOT retired, paradoxical as that may seem.

And finally …

Today is Boxing Day and I will probably CHOOSE not to do much more work on these sites, or for paying clients, until the New Year begins, apart from a few pre-arranged pieces and guest blogs. I wish all readers a very Happy New Year. See you on the other side!

Time running out for Tax-Loss Selling

Posted By |

Christmas Eve and New Years at midnightNot to put any pressure on anyone trying to finish their Christmas Shopping, but Wednesday, Dec. 24 is also the last day Canadians can sell stocks for tax-loss harvesting purposes.

You need three days to settle trades so next week just before New Year’s will be too late. Christmas on Thursday is obviously a holiday and Canadian markets are closed Friday for Boxing Day.

Americans have a little bit longer, since U.S. markets will be open part of the day Friday.

More details in my current MoneySense blog.

Free to Be: A Lesson in Financial Independence

Posted By |

The guest blog below by certified financial planner Matthew Ardrey followed a discussion we had on social media about the distinction between traditional retirement and financial independence. Matthew, who is with T. E. Wealth, uses a definition of financial independence that is virtually identical to the one we use on this site, right down to having a paid-for home. We especially like this line: “One can be retired and not financially independent or vice versa.” Over to Matt:

MattArdrey
Matthew Ardrey, T.E. Wealth

By Matthew Ardrey, CFP

Special to the Financial Independence Hub

I was first introduced to the concept of retirement as a young boy, when my grandfather retired from the TTC on his 65th birthday. I understood that he no longer worked, and that this is what you do when you reach 65. From the eyes of a child, it seemed like a far away notion.

It wasn’t until 2000, when I started working in the financial services industry, that I was properly introduced to the concept of financial independence as it differs from retirement. The proprietary financial planning software we used at my workplace did not have a retirement calculator. Instead, it had a “Financial Independence Needs” analysis tool. As I was young and green, I saw it as a fancy way of saying retirement planner. Through the benefit of experience, I would soon discover that financial independence was something else entirely.

Retirement vs. Financial Independence

Retirement, by definition, is the cessation of work with the intent of not returning. Financial independence, on the other hand, is having sufficient financial assets to have the choice about whether or not you continue to work. So, one can be retired and not financially independent or vice versa.

When I explain financial independence to my clients, I let them know that the main differentiator is freedom of choice. If you are not financially independent, you have no choice but to continue working if you don’t want to alter other aspects of your life. Once you are financially independent, you can choose if you want to continue to work in the same capacity – or at all. This freedom to choose is empowering and it’s what I encourage all of my clients to work towards.

How to Get There

I’m often asked how one can get to this wonderful nirvana known as financial independence. The first step is to pay off your home. By having a debt-free residence, you have eliminated what is most people’s largest single expense. Without this hanging over your head, you have freed up significant cash-flow.

The second step is budgeting – both before and after you have reached financial independence. Before, determine what you will need to save to reach your goals, and pay yourself first. After, understand what and how you spend to determine if you have accumulated sufficient assets in the “before” stage.

Know Your Asset Returns

Understand the return on the assets that are funding your freedom. Which assets in your portfolio are generating income or appreciating, and at what rate are they growing? How are taxes affecting these returns? These are questions to which you should know the answer, as small changes in that rate compounded over a long period of time can have a significant effect.

Costs matter, period. Focus on the cost/benefit relationship of your investment structures. Benchmark both what you make and what you pay to make it. If you find that the costs are inordinate while the performance is average or worse yet, lackluster, take steps to fix the cost/benefit. Even better yet, get the jump on “CRM2” by asking your advisor to fully delineate all costs pertaining to your investments and what services are offered in exchange for these costs.

As I guide my clients towards their future goals, I find the word “retirement” is used less and less in my lexicon. When my clients leave the workforce, the pursuits they undertake tend to be much different from my grandfather’s, who retired 35 years ago. What they are pursuing is the freedom to make their life whatever they want it to be.

Matthew Ardrey is a Certified Financial Planner with T. E. Wealth. He can be reached at its Toronto offices here. He is also on Twitter as @MattArdreyCFP. 

Why I Pushed My Findependence Day Back 5 Years

Posted By |
robb-engen
Robb Engen, Boomer & Echo

By Robb Engen, Boomer & Echo

Special to the Financial Independence Hub

Last summer I thought I’d be financially free by 40. Reality – and unplanned expenses – set in this year and I’ve adjusted that ambitious projection by five years. I’m still on track to reach a net worth of $1 million by the time I turn 41, but financial independence will have to wait a few more years.

Here’s why:

Remember, financial independence doesn’t necessarily mean retirement. It simply means the date your income from investments exceeds your day-to-day expenses so that you no longer have to rely on regular employment to meet your needs.

My initial projection was indeed ambitious – with us having a paid-off mortgage by 2020 and increasing the income withdrawn from our business by 100 per cent (from $3,000 per month to $6,000).

But borrowing $35,000 to develop our basement this year meant we couldn’t continue our aggressive mortgage pay-down, and a four-year car loan has cut into our ability to save as much as we wanted.

That’s okay – on paper the original plan didn’t factor in these expenses, plus I hadn’t fleshed out exactly how I’d make those numbers work. Now I have a better idea, but unfortunately it’ll cost us five years. Here’s our financial Freedom 45 plan:

Financial independence at 45

In late 2016, once we pay off the HELOC and car loan, we’ll have $27,000 per year to save toward our ‘findependence’ goal. With that amount, we’ll put $12,000 into my RRSP and $10,000 into our TFSAs, plus throw an extra $5,000 payment toward our mortgage.

That pushes our mortgage freedom date back to January 1, 2025. At that time, our home should be worth $600,000 (using a conservative 3 per cent annual growth rate), my RRSP should be worth $380,000, tax-free savings accounts should total in excess of $150,000, and the commuted value of my defined benefit pension will be roughly $310,000.

The key to paying our monthly expenses after financial independence will come from our business income. We currently withdraw $3,000 per month from our small business, which includes income earned from three websites, freelance writing, and from my fee-only financial planning business.

My original plan showed business income increasing to $6,000 per month in five years, but without any clear path to explain how to double revenue. And, after losing my main freelancing gig at the Toronto Star, this goal seemed unrealistic.

But the fee-only planning service has gone better than anticipated – earning $10,000 in less than one year and expected to grow to $18,000 in year two as existing clients stay on and I continue to add one or two clients per month.

After completing the CFP certification in two years I’ll have the opportunity to ramp up my efforts and potentially offer fee-only planning services full-time. At that point, between existing and new clients, the service could bring in roughly $36,000 per year.

My three blogs collectively earn about the same – $36,000 per year – after expenses and so if I can maintain or increase that income then I’ll be able to meet my $6,000 per month goal for business income.

Our projected expenses haven’t changed. After the mortgage is paid off we could live comfortably on $36,000 per year, which leaves the additional $36,000 of income to go toward taxes, short-term savings, and retirement.

Final thoughts

A financial plan is just words on a page unless you commit to taking action. Even if your financial independence date seems like a moving target, it’ll become more precise as you monitor and update projections based on your true reality.

While it’s disappointing to push financial independence back five years, it’s comforting to know that I’m zeroing in on a target date that’s based on reality and not a wild projection.

Editor’s Note:You can find the original version of this blog at Boomer & Echo earlier this week, here. Note too the several comments at the bottom. When we can coordinate at both ends, we hope to make Robb or Marie’s blog available here as many Thursdays as we can manage. Also, in his original headline, Robb used the phrase “Findependence Date.” When I asked why not “Day,” he said he “didn’t want to steal your thunder.” I realize that good bloggers respect others’  intellectual property but let me make it clear that I’m fine with people using the phrase Findependence Day and Findependence. Half the point of this site is to bring these terms into general usage and displace “Retirement.” — JC

If you can’t take the pain of plunging markets, don’t watch

Posted By |

The Financial Post ran this column by me this weekend about my take on the market mayhem of the past week, most of it triggered by plunging oil prices.  While I’ve chosen to put this in the Wealth Accumulation section of the Hub, it occurs to me that the way things are going, it could also be in Decumulation: albeit not the kind of Decumulation we had in mind when we created the section!

For convenience and archiving purposes, I’ve included the full piece below:

Depositphotos_19057551_xsBy Jonathan Chevreau

The worse it gets, the less I look and the less I act. When it comes to market mayhem, I firmly believe that the time to sell is when stocks are up and everyone is buying.

Except maybe in 2008, when it seemed financial Armageddon was genuinely possible, panic seldom serves the investor well in the long run. I understand the psychology of panic as markets sink: fear takes control and investors become convinced that with every passing day, their wealth will vaporize. And yes, if you knew for sure that markets were due for a 10% correction or 20% bear market, then it would make sense to sell.

But we don’t know for sure what tomorrow will bring, and certainly not what stock market averages will be. We do know that interest rates right now are still near historic lows, even if they are expected to start moving higher in 2015. We know that in the long run, stocks are the best-performing asset class, even measured against fixed-income investments that pay more than what is on offer late in 2014. And therefore, for time horizons of five years or longer, investors accept – or should accept – that a significant portion of their wealth should be invested in stocks.

Preferably quality dividend-paying stocks spread across the major economic sectors. Barring that, a broadly diversified “Couch Potato” portfolio of index funds or exchange-traded funds, with exposure to all economic sectors and roughly equal geographical exposure to Canada, the United States and international markets outside North America.

Did they say were plunging or plummeting?

 “But markets are plunging!,” the recent convert to stocks cries. Or worse, plummeting, if indeed plummeting denotes a bigger drop than a mere plunge. You can be sure that headlines will make liberal use of both verbs if this correction continues.

So what to do? If your mix of investments was decided in happier times and you’re comfortable with the amount of risk you had agreed to, then I’d say do nothing. Or, if you have sufficient cash reserves, I’d say buy stocks while they’re on sale. Certain sectors – oil stocks and commodities in general – certainly appear to be on sale. Oil is a cyclical commodity and it seems like only yesterday when the doomsayers were predicting $150 or $200 oil. That day will likely come again but in the meantime many people and companies benefit from rock-bottom oil prices: airlines to name one, and everyday commuters to name a second group of beneficiaries of low-priced oil.

Pros were buying this week

When the mayhem really started to gather steam this week, I was at a meeting with a group of semi-retired professional pension managers and investors. We barely talked about the markets over the two hours we had together, although when it did come up peripherally, one said he was buying the market across the board at these levels, while another was scooping up specific individual oil stocks.

But what if you’ve come to the sickening realization that your risk tolerance isn’t quite as hardy as you thought it was? If you were 90% in stocks but really can’t handle a 30 or 40% potential drop in more than half your portfolio, then you know your optimal asset allocation would be closer to 50% stocks to 50% bonds, not 90% to 10%. But “rebalancing” your investment mix is much better performed when stocks are rising, not falling. You’ve heard the expression “catching a falling knife?” Selling even more stocks into a broadly based general market sell-off is not a recipe for making long-term profits in the stock market.

Consolation of tax-loss selling

However, since it is tax-loss selling season and if you had previously booked gains on some winners in a taxable portfolio, you could sell a few losers right now and get your cash up to a more tolerable level, and tax-wise merely offset the previous gains. That way, at least, the taxman would share your pain and if markets worsened in the coming weeks or months, you’d have a bit of cash to snap up some real bargains, if indeed they materialize.

Of course, the declines could end as suddenly as they began. Personally, I am taking no action at all during this sell-off. And as my financial advisor often reminds his clients, if you’re in dividend-reinvestment plans, as stocks fall you’ll be reinvesting in those stocks at slightly better prices. High-yielding dividend payers will start to pay out even more tempting amounts. When stocks previously paying out 3 or 4% start yielding 5 or 6% (as the stock values themselves fall), I’d be tempted to load up on more, as many did at the depths of 2008.

Until then, try not to overdose on the day-to-day melodrama of crashing markets. Go for long walks, read fiction or otherwise get your mind off paper losses that may prove to be merely temporary.

Jonathan Chevreau recently launched a North American web portal focused on financial independence: http://www.financialindependencehub.com. He can be reached at jonathan@findependenceday.com