Tag Archives: Financial Independence

Retired Money: Can retired Boomers afford to be the BOMAD to their kids?

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My latest MoneySense Retired Money column looks at the question of whether almost-retired or already-retired Baby Boomer parents should provide financial assistance to their Millennial children seeking to get their first steps on the increasingly expensive housing ladder.

That is, is it wise for parents to cut into their own Retirement savings in order to become the BOMAD: the Bank of Mum and Dad?

It’s been said that 50 to 75% of millennials expect to tap the BOMAD for help coming up with a down payment.Click on the highlighted headline to retrieve the whole column: Should you help your adult children to buy Real Estate?

A couple of the column’s sources arose after I appeared on Patrick Francey’s The Everyday Millionaire podcast.

Francey is a seasoned entrepreneur and real estate investor who is CEO of REIN of the Real Estate Investment Network (REIN). These days, most REIN members who have at least one “door” (real estate investment property above and beyond a principal residence) are almost by definition millionaires. I appeared despite the fact our family owns no investment real estate, apart from REIT ETFs in a purely electronic portfolio: “clicks instead of bricks,” as I explained on the show.

REIN’s Patrick Francey, host of The Everyday Millionaire podcast

Interestingly, while he has helped his own kids with housing, Francey does not necessarily think parents should provide financial assistance to kids trying to break into the housing market: not if it jeopardizes their own retirement, and not if it means the kids will miss out on the character-building exercise of doing it on their own.

A similar stance came from retired mortgage broker and author Calum Ross, who also recently appeared on the podcast. Ross, of Toronto-based The Mortgage Management Group, has some experience with BOMAD as it relates to his two daughters.   “As a divorced Dad, BOMAD was restructured and now runs as a privately held entity BOD [Bank of Dad.],” Ross quips.

Ross says his parenting priorities are identical to how his parents raised him: 1) I taught them to be thoughtful, 2) I raised them with a work ethic, and 3) I taught them to save money and not spend it.

Adrian Mastracci, portfolio manager with Vancouver-based Lycos Asset Management, says BOMAD may be a great deal for the kids but Mum and Dad need to first ensure they have sufficient funding to see them through their retirement years. “Ensure that they can incur all expenses, health costs, effects of inflation, rising costs of providing for in-home services, a retirement home facility and rehabilitation costs of the current home.” Continue Reading…

Rethinking Retirement (RIP) and FIRE

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

Today’s post will weave together retirement as seen in a more traditional sense and those who practice F.I.R.E. – an acronym for financial independence and retire early. In the Globe and Mail Brenda Bouw offered that the COVID pandemic is giving early retirees second thoughts, they’re going back to work. On FiPhysician, Dr. David Graham offers that traditional retirement is dead – RIP. The old approach will fall on its face. We might run out of money before we run out of time. We will also see how Justwealth has crushed mutual funds over the last five years. Enjoy. We’re rethinking retirement on the Sunday Reads.

We’ll start with rest in peace RIP retirement on FiPhysician. Or, is retirement an acronym? Of course on this site Dr. Graham inspired – how does the pandemic end?

Well, with the common cold.

We no longer work til we drop dead

That retirement piece shows how retirement risks have changed. We are no longer working until we drop dead Dr. Graham offers. We are living longer (generally are much more healthy) than past decades and centuries and we will spend decades in retirement. The traditional retirement funding approach used by our parents and grandparents will not get the job done. Traditionally, social security (CPP in Canada) a pension and home value would do the trick. That requires a re-think offers Dr. Graham.

For starters those government pension won’t keep up with ‘real inflation’ compared to what the government reports. Lots of fudging of ‘official’ numbers on that front.

So, with the three-legged stool of traditional retirement, you cannot keep up with inflation over longer periods of time. Retirement is an anachronism because you cannot fund it.

On the future of retirement and how we might best prepare …

Consider that which is currently changing the world of employment: smart phones and the gig economy.

You won’t retire in the future; you will monetize your hobby and have gigs from your smart phone. After all, we must move from a knowledge-based society to a wisdom-based one. Everyone has knowledge at the tip of their fingers all the time. Who has all the wisdom?

So funny, as I am personally living that now, and by design. I am living proof as are many in today’s new normal for “retirement”. I have the portfolio, I monetize any knowledge or wisdom that might have value. Any gov pension will be a bonus that will not be counted on in any meaningful way. We have real estate.

Protect the portfolio from inflation

I am also of the school that we can protect our portfolio income assets from inflation. And research shows that we need the true inflation fighters such as gold and other commodities and real assets. Continue Reading…

Two types of overconfident investors

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I started investing in individual stocks shortly after the Great Financial Crisis ended in 2009. I picked an investing strategy that closely resembled the Dogs of the TSX, buying the 10 highest yielding Canadian dividend stocks. As you can imagine, the share prices of these companies got hammered during the stock market crash so I was able to scoop up shares in banks, telecos, pipelines, and REITs on the cheap.

Stocks came roaring back right away and my portfolio gained 35% by the end of 2009. Investing is easy, right?

It took me a while to figure out that my portfolio returns had less to do with my stock picking prowess and more to do with market conditions, luck, and the timing of new contributions. The rising tide lifted all ships, including my handful of Canadian dividend stocks.

I started comparing my returns to an appropriate benchmark to see if my judgement was adding any value over simply buying a broad market index fund. My portfolio outperformed for a few years until it didn’t. In 2015, I had enough and switched to an index investing strategy. Now I invest in Vanguard’s All Equity ETF (VEQT) across all of my accounts.

Related: Exactly How I Invest My Money

New investors who started trading stocks in the past 18 months have likely had a similar experience. Stocks crashed hard in March 2020, falling 30%+ from the previous month’s all-time highs. Since then markets have been on an absolute tear. The S&P 500 is up 91% from the March 2020 lows. The S&P/TSX 60 is up 70%.

That’s just country specific market indexes, mind you. Since March 2020 individual stocks like Facebook and Apple are up 137% and 155% respectively. Tesla is up 700%. Meme stock darlings AMC and GameStop are up 1,045% and 3,621% respectively.

No doubt, unless they’ve done something disastrous, new investors participating in this market have seen incredible returns so far.

This can lead to overconfidence – when people’s subjective confidence in their own ability is greater than their objective (actual) performance.

Overconfident Investors

Larry Swedroe says the biggest risk confronting most investors is staring at them in the mirror. This is the first type of overconfident investor.

Overconfidence causes investors to trade more. It helps reinforce a belief that any investment wins are due to skill while any failures are simply bad luck. According to Swedroe, individual investors tend to trade more after they experience high stock returns.

Overconfident investors also take on more uncompensated risk by holding fewer stock positions.

Furthermore, overconfident investors tend to rely on past performance to justify their holdings and expectations for future returns. But just because stocks have soared over the past 18 months doesn’t mean that performance will continue over the next 18 months.

In fact, you should adjust your expectations for future returns – especially for individual stocks that have increased by 100% or more. No stock, sector, region, or investing style stays in favour forever. If you tilt your portfolio to yesterday’s winners (US large cap growth stocks) there’s a good chance your portfolio will underperform over the next decade.

The second type of overconfident investor is one who makes active investing decisions based on a strong conviction about how future events will unfold.

Related: Changing Investment Strategies After A Market Crash

Think back to the start of the pandemic. As businesses shut down around the world it seemed obvious that global economies would suffer and fall quickly into a massive recession. The stock market crash reinforced that idea. Investors hate uncertainty, but this time it seemed a near certainty that stock markets would continue to fall and remain in a prolonged bear market.

Markets quickly turned around as central banks and governments doled out massive stimulus to keep their economies afloat and their citizens safe at home. Now it became ‘obvious’ that investing in sectors like groceries, cleaning supplies, online commerce, and video technology would produce strong results. Continue Reading…

8 things to know before applying for Life Insurance

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What should someone know before applying for life insurance?

To help you prepare for life insurance application processes, we asked insurance experts and business leaders this question for their best advice. From researching the required health tests to budgeting monthly costs, there are several tips that may help you when applying for life insurance.

Here are eight things to know before applying for life insurance:

● Know What Test Might be Done
● Clarify Term Life vs. Whole Life
● Determine Your Why
● Gather Your Paperwork Early
● Check Your Health Prior
● Assess Length of Policy
● Budget Monthly Costs
● Figure Out Future Needs

Know What Tests Might be Done

In the past, my life insurance companies would test for marijuana and reject applications for applicants who tested positive for marijuana use. However, since marijuana is legal in several states, but still illegal at the federal level, it is wise to work with an insurance expert to help work you through the process so you can find the right policy at the best rates to meet your needs. — Chris Abrams, Marcan Insurance

Clarify Term Life vs Whole Life Insurance

Learn the difference between term life insurance and whole life insurance so you can select the option that works best for your situation and budget. Term life insurance is an agreement between you and your insurance provider that lasts between 10-30 years. This type of insurance does not usually require a health exam. On the other hand, whole life insurance is truly meant to last your lifetime and carries additional benefits. However, it is also more costly. Understanding how these policies differ can help you make an educated decision about your life insurance. — Brian Greenberg, Insurist

Determine Your Why

The reasons why you are getting life insurance factor into the coverage amount and type of coverage you’ll receive. This can also help motivate you to stay consistent with payments. Most people who have families that rely heavily or solely on them for financial support and stability might opt to get sufficient life insurance coverage in the event of an unexpected death. Depending on the amount and type of life insurance, you provide an income replacement for your family in your absence. –– Rronniba Pemberton, Markitors

Gather Your Paperwork Early

Before applying for life insurance, it’s important to know what kind of personal information you’ll need to give the company. Some companies require detailed medical records while others just require simple information such as your name, date of birth, place of residence, and social security number. Prepare documents accordingly to ensure there won’t be any surprises along the way. — Tim Mitchum, WinPro Pet

Check Your Health Prior

Before applying for life insurance, you should be aware of your health. If you are rejected for life insurance, you could be affected down the road. You could have trouble getting life insurance from another company. Your credit score could even be lowered. The cost of life insurance could be raised out of your reach due to poor health. Learn if you have a preexisting condition. You can be denied life insurance if you have preexisting conditions. Check on the status of your own health condition before asking a life insurance examiner to look at you. — Janice Wald, Mostly Blogging Academy

Continue Reading…

Why the 4% Rule doesn’t work for FIRE/Early Retirement

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By Mark and Joe

Special to the Financial Independence Hub

The 4% rule is a common rule of thumb in many retirement planning circles, including the Financial Independence, Retire Early (FIRE) community in particular.

What does the 4% rule actually mean?

Should the 4% rule be used for any FIRE-seeker?

Does the 4% rule really matter to retirement planning at all?

Read on to find out our take, including what rules of thumb (if any) we’re using at Cashflows & Portfolios for our early retirement dreams.

The 4% rule is really a starting point for a safe withdrawal rate

Unlike 2 + 2 = 4, the 4% rule is not really a universal truth for any retirement plan at all.

It is, however, in our opinion, a great starting point to understand the impacts of asset decumulation, related to inflation, over time.

As you’ll read more about in the sections below, the 4% rule is fraught with many problems. None more so than for an early retiree or FIRE-seeker. In some cases, for the FIRE community, we believe the 4% rule should no longer be used at all.

Are any financial rules really rules?

Backing up, here is the source for the 4% rule.

The article from 1994!

4% rule

Despite the geeky photo, by all accounts, Bill Bengen was one heckuva guy and a smart guy as well!

Potentially no other retirement planning rule of thumb has received more attention over the last 25-30 years than Bengen’s publication about the 4% rule. This publication in 1994 has triggered a new generation of devotees and arm-chair financial planners that are using this quick-math as a way to cement some retirement dreams. We believe that is a mistake for a few reasons.

First, let’s unpack what the 4% rule really means.

What does the 4% rule actually mean?

From the study:

“In Figures 1 (a)-l(d), a series of graphs illustrates the historical performance of portfolios consisting of 50-percent intermediate-term Treasury notes and 50-percent common stocks (an arbitrary asset allocation chosen for purposes of illustration). I have quantified portfolio performance in terms of “portfolio longevity”: how long the portfolio will last before all its investments have been exhausted by
withdrawals. This is an intuitive approach that is easy to explain to my clients, whose primary goal is making it through retirement without exhausting their funds, and whose secondary goal is accumulating wealth for their heirs.”

Unpacking this further, for those that do not want to read the entire study, here is something more succinct from Bengen:

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.

 

“Should be safe”.

Again, the theory is one thing. Reality is something different and the financial future is always subject to change. Furthermore, if you’re blindly following this formula without considering whether it’s right for your situation, let alone putting in some guardrail approach to monitor your portfolio value at various checkpoints, you could end up either running out of money prematurely or being left with a huge financial surplus that you could have spent during your retirement. We’ll prove that point in a bit from another leading author.

Should the 4% rule be used for any FIRE-seeker?

Probably not. For many reasons.

Recently, Vanguard published an outstanding article about the need to revise any thinking about the 4% rule for the FIRE movement – a driver for this post.

Although the 4% rule remains a decent rule of thumb we believe most FIRE-seekers should heed the cautions in the Vanguard post. Here are some of our thoughts based on the article’s contents.

  • Caution #1 – FIRE-seekers should not rely on past performance for future returns

We agree. In looking at this Vanguard set of assumptions below, and based on our own personal investing experiences, we believe historical returns should not be used to guarantee any future results.

 

Source: Vanguard article – Fueling the FIRE movement

While the FP Canada Standards Council doesn’t have a multi-year (10-year) return model in mind, they did highlight in their latest projection assumption guidelines that going forward, investor returns may not be as juicy as in years past.

 

Source: FP Canada Standards Council.

This means for any historical studies, while interesting, may not be a great predictor of any future outcomes.

  • Caution #2 – The FIRE-seeking time horizon is longer

Bengen noted in his 1994 study:

“Therefore, I counsel my clients to withdraw at no more than a four-percent rate during the early years of retirement, especially if they retire early (age 60 or younger). Assuming they have normal life expectancies, they should live at least 25-30 years. If they wish to leave some wealth to their heirs, their expected “portfolio lives” should be some longer than that. “

Bengen goes on to say:

“If the client expects to live another 30 years, I point out that the chart shows 31 scenario years when he would outlive his assets, and only 20 which would have been adequate for his purposes (as we shall see later, a different asset allocation would improve this, but it would still be uncomfortable, in my opinion).
This means he has less than a 40-percent chance to successfully negotiate retirement–not very good odds.”

To paraphrase, Bengen’s study was relevant to 30 years in retirement. Not 35 years. Not 40 years and certainly not 50 years like some FIRE-seekers may need if they plan to retire at age 40 and live to age 90 (or beyond).

This is simply a huge reminder that your time horizon is a critical factor when it comes to retirement planning.

  • Caution #3 – FIRE-seekers may need to live with more stocks

Bengen’s 1994 study was based on the following:

“Note that my conclusions above were based on the assumption that the client continually rebalanced a portfolio of 50-percent common stocks and 50-percent intermediate-term Treasuries.” Continue Reading…