Tag Archives: Financial Independence

Is FIRE impossible for reasonable people?

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By Michael J. Wiener

Special to the Financial Independence Hub

“Whether you think you can, or you think you can’t ― you’re right.”
― Henry Ford

Retiring in your 30s or 40s seems like an impossible dream for most people. But the FIRE (Financial Independence Retire Early) movement is filled with people whose goal is to retire well before the usual retirement age. Critics say these FIRE penny-pinchers deprive themselves of any joy in their lives, and that FIRE is impossible for reasonable people. There is some truth to this, but not much.

The truth is that most adults have created a life for themselves that makes FIRE impossible without huge changes. They bought a big house far from where they work and own cars for commuting. They’ve committed almost all their income for the foreseeable future to a lifestyle they’ve chosen. No amount of eating in or other penny-pinching will make a big enough change to make FIRE possible.

That isn’t to say that smaller changes don’t help. Cutting out small amounts of spending here and there can improve your life tremendously. The key is to identify spending that isn’t bringing you happiness. But this type of change won’t shorten your working life by decades.

Best to start FIRE before making huge financial commitments

For FIRE to be a reality, it’s best to start before you make huge financial commitments. Instead of buying a big house far from where you work, you choose to rent or buy a modest place close to work. The savings can be huge. Reducing your commute by 25 km each way saves about $5,000 per year. Renting or owning a smaller place can save much more. By avoiding building an expensive life, it’s possible to save much more of your income and build toward early financial independence.

If you’ve already built an expensive life, changing to the FIRE path requires big changes. It likely means selling your home, selling expensive cars, and moving to a modest place closer to work. Few people are willing to make these changes.

None of this means it’s wrong to buy a big house for your family in the suburbs and commute a long way to work. It’s just that this choice precludes early retirement. Life is about choices. FIRE is not impossible; it just requires the right set of choices on the most expensive things in life. However, most people tend to push big choices like houses and cars right up to the limit of their income supports. Continue Reading…

10 ways to get retirement ready

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By Mark Seed

Special to the Financial Independence Hub

You’ve worked your entire life. You put some money away; invested, watched that money now and then over time.

Yet instead of living it up for everything you’ve worked so hard for you’re counting coins to make ends meet.

I don’t want this to happen to me. I don’t want it to happen to you either.

Inspired by an article I read some time ago, why retirement might not work out for you, I’m going to go on the offensive: here are 10 ways I plan to get retirement ready.

Retirees or prospective retirees please chime in!

1.) I will favour stocks over bonds

Most retirees are worried about out-living their savings. With inflation as a massive wildcard in our collective financial future, this fear is not unwarranted.

One way to combat inflation is to own more stocks (for growth) than bonds (for income security when equities tank) in retirement. You could argue that a 70/30 stock to bond split might be a good starting point to enter retirement with.

I own 100% equities in our portfolio now. We have that bias to equities because I consider my future defined benefit pension plan “a big bond.” Eventual Canada Pension Plan (CPP) and Old Age Security (OAS) payments in our 60s will also be part of our fixed-income component.

Got a pension plan?  Lucky you.  Consider that a big bond.

Here is when to take CPP.

Here are the facts about taking OAS you need to know.

While it might be scary (for some) to watch the volatility of your stock portfolio go up and down like a yo-yo short-term, owning a nice blend of stocks and bonds should help you combat inflation rather well.

What % of stocks and bonds and cash do retirees out there use today?

2.) I will embrace diversification

Diversification is important when it comes to investing because by doing so, you can enhance returns while reducing the portfolio risk long-term. A pretty great deal.

For most of us, diversification means an appropriate mix of stocks and bonds, a blend of small-cap, medium-cap, and large-cap stocks; owning various sectors of the economy; owning stocks from countries or investing in economies from around the world.

It can also mean owning assets that are not always correlated to common stocks, like real estate investment trusts (REITs).

Source: NovelInvestor.com

While diversification will never guarantee you big profits, it will help you eliminate the risk of investment losses given that not all assets move in the same direction at the same time.

When it comes to getting ready for my semi-retirement, I may consider owning some low-cost, all-in-one asset allocation Exchange Traded Funds (ETFs) to increase the diversification across my portfolio while simplifying my investing approach for my senior years.

These are some of the best all-in-one ETFs to own.

3.) I will consider a die-broke plan

My parents are very fortunate to have defined benefit pension plans and have a bit of RRSP/RRIF money to draw down in the coming few years. I’ll be working on their strategy this year.

They also own most (not quite all) of their home.

With good planning and careful spending in their 70s, they will definitely have enough money to live comfortably for a few more decades: thanks to their workplace pensions and government benefits.

However, they are not planning to leave any inheritance: and that’s more than OK with the kids (!).

They have a die-broke or at least a near die-broke plan to around age 95

I think this makes great sense.  Working backwards (from age 95), you can calculate a more measured approach to spending money now while earmarking some funds to fight any longevity risk.

At the end of the day, as our lawyer said recently to us when we closed on our condo purchase:  “it’s only money.”

Figure out your estate plan and work backwards.  I suspect in doing so that will help your retirement preparedness.

Do retirees reading this site have a die-broke plan or an estate plan?

4.) I will track my spending (in more detail)

Ideally, all any retiree would need to know is: is enough money coming in to cover what expenses are going out?

Consider the following as part of your back-of-the-napkin calculations:

  • Do you have a rolling monthly credit card balance? If so, you’re spending too much.
  • Do you have a growing line of credit balance? If so, you’re spending too much.
  • Are you able to keep a cash wedge or an emergency fund topped up with cash? If not, you’re spending too much.

To get to retirement in the first place, you probably needed a budget.  There is no reason why you shouldn’t keep one throughout retirement.

I plan to up my game in the coming years, to keep a more detailed tracking log of our spending as we enter semi-retirement.  This will allow me to better forecast any travel expenses we intend to incur.

For now though, I believe this is a better way to budget.

How do you budget?

5.) I will rely on multiple income streams

Canada Pension Plan (CPP) and Old Age Security (OAS) won’t be enough for us.  It might not be enough for you.

While a base-level of income security will be provided from both government programs, for most adults who have worked and lived in Canada for many decades, the sum of this income probably won’t be enough to cover all housing, food, transportation and health-related expenses.

By relying on multiple income streams, beyond government benefits, this will increase your chances to meet retirement income needs and wants.

Here are our projected income needs and wants in retirement.  Do you know yours?

6.) I will disaster-proof part of my life Continue Reading…

VBAL vs. Mawer Balanced Fund for One-stop investing

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Investors could have done a lot worse over the past 30 years than investing in the Mawer Balanced Fund. Mawer, which epitomizes the art of boring investing, has been nothing short of consistently brilliant: with annual returns of 8.5 per cent since the fund’s inception in 1988.

Investment giant Vanguard doesn’t have the same longevity or track record here in Canada, but its launch of the Vanguard Balanced ETF portfolio (VBAL) gives investors another one-stop investing option.

This post will go under the hood and compare VBAL to the Mawer Balanced Fund for investors looking for a one-stop investing solution for the next two to three decades.

About Vanguard

Vanguard is legendary in the United States and is largely credited for pioneering low-cost index investing. It came to Canada in December, 2011 and now offers nearly 40 ETFs and four mutual funds to Canadian investors with a total of $17 billion in assets under management (Dec 2018).

VBAL was introduced by Vanguard Canada in January, 2018 as part of a new suite of asset allocation ETFs (including VGRO and later VEQT). These funds have proven popular among Canadian investors and have collectively gathered more than $1 billion in assets.

Before their introduction, investors did not have access to a one-stop ETF solution. Instead, they’d have to build multi-ETF portfolios to get exposure to Canadian, U.S., and International equities, plus another ETF or two for fixed income.

Vanguard turned that around with what I’ve called a game-changing investing solution. VBAL represents the classic 60/40 portfolio.

Vanguard Balanced ETF (VBAL)

VBAL is a fund of funds. That means its underlying holdings are made up of other Vanguard funds. So rather than seeing a bunch of individual stocks and bonds in VBAL’s holdings, you’ll instead see these seven products:

  • Vanguard US Total Market Index ETF
  • Vanguard Canadian Aggregate Bond Index ETF
  • Vanguard FTSE Canada All Cap Index ETF
  • Vanguard FTSE Developed All Cap ex North America Index ETF
  • Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged
  • Vanguard US Aggregate Bond Index ETF CAD-hedged
  • Vanguard FTSE Emerging Markets All Cap Index ETF

The fund’s mandate is to maintain a long-term strategic asset allocation of equity (approximately 60%) and fixed income (approximately 40%) securities. It’s as diversified, globally, as you can get: with a whopping 12,318 stocks and 15,412 bonds wrapped up inside this one-stop balanced ETF.

VBAL Holdings

VBAL has net assets of $675 million (June 30, 2019). Its distribution or dividend yield is 2.58 per cent (dividends paid quarterly). Its management expense ratio or MER is 0.25 per cent.

Investors can purchase VBAL through a discount brokerage account and it is an eligible investment inside an RRSP, RRIF, RESP, TFSA, DPSP, RDSP, or non-registered account.

VBAL’s performance data only goes back to its inception date of January 24, 2018. It has returned 4.05 per cent annualized since that time, and 10.44 per cent year-to-date (July 30, 2019).

Justin Bender, a portfolio manager at PWL Capital, has simulated the returns as if the fund did exist for the past 20 years and found the following annualized returns (as of June 30, 2019):

  • 1-year return – 5.09%
  • 3-year return – 7.22%
  • 5-year return – 6.62%
  • 10-year return – 7.95%
  • 20-year return – 5.34%

You can read more about VBAL and its fact sheet and prospectus here.

About Mawer

If Vanguard is legendary for pioneering low cost investing, Mawer has achieved cult-like status among active investors for an incredible track record of outperforming its benchmarks. Mawer was founded in 1974. It’s a privately owned, independent investment firm, managing over $55 billion in assets. Mawer has locations in Toronto, Calgary, and Singapore.

While its philosophy is ‘be boring,’ Mawer’s performance is anything but. Of its 13 mutual funds, eight have beaten their benchmark index since inception: including the Mawer Balanced Fund, which trounced its benchmark over the last decade (9.9 per cent to 7.8 per cent). Continue Reading…

Retirement planning software and the 70% Rule

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By Ian Moyer

(Sponsor Content)

Individuals who are following conventional retirement-planning may be in disbelief as they approach retirement and discover that they cannot afford to retire just yet or are likely to outlive their retirement funds.

The 70% Rule

Common practice is to save enough so that your annual retirement income equals about 70% or more of your current income. Of course, many Canadians are not aware of such information entirely and have saved little or not enough for their retirement.

With this being said, there are still some fundamental issues with this understanding. One, few people have a complete understanding of their retirement resources or a realistic view of their retirement funds. In some cases, 70% retirement pay usually isn’t enough to sustain them in retirement.

Example

We’ll use the fictitious name Tom for this example. Tom is making $60,000 annually living a modest lifestyle. Tom will qualify for CPP and OAS. Tom only contributes through his employer-directed contribution program, which is $2500 a year.

Tom also saves $13,000 in a regular checking account, an additional $3,000 in non-registered savings and $12,000. Tom is a conservative investor and he thought he was doing pretty well saving what he can and living a modest lifestyle.

Using Cascades to do retirement planning at the age of 54 using the above figures. Tom discovers his annual income will only be approximately $38,250. After taxes per year. Going back to the common practice of 70% Tom needed minimum $42,000 per year as retirement income. This leaves Tom needing to find a way to make an additional $3750 a year. Tom would need a part-time job, choose not to retire or drastically change his lifestyle in retirement.

For a lot of individuals, they will have to work longer than they planned or seek part-time employment during retirement. This could be a problem for retirees and employers. In order to navigate this issue before it starts employers need to assist their employees with retirement planning.

Sample Cascades recommendations for maximizing an estate

How can we change this?

The first step would be for employers to become more effective at helping employees realistically prepare for and manage their retirement. For example, this could include a process or program to build up wealth accumulation prior to retirement, which could be a mix of LIRA, Capital Gains or RRSP just to name a few.

A second step would be for employees to change their behaviours and thoughts around retirement savings. Employees can make changes by becoming more proactive when it comes to saving. When some individuals think about saving for retirement after they attend school, buy a home, raise children and send them to college sometimes it can be too late. Continue Reading…

 How to improve the financial wellness of the Canadian workforce 

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By Jean-Philippe Provost, Mercer Canada 

Special to the Financial Independence Hub

For Canadians, wealth management and financial decisions can represent an endless source of stress: whether putting money aside for an important purchase, paying off debt, or saving for retirement. Increasingly, this stress is interfering with workplace health and productivity. 

A company’s most productive asset is their people: when employees are unhealthy, financially or physically, the organization as a whole suffers. Helping employees feel confident about wealth management matters and guiding them towards financial wellness is not just a nice to have: it is a need to have. A healthy workforce means a healthy company: and a healthy bottom line. 

The impacts of financial stress on the workforce 

At Mercer, we have spent years studying the workplace trends, the evolving realities and the challenges faced by workers in Canada. Our most recent research into Canadians’ financial wellness found that if employers help employees achieve financial wellness, they too will reap the rewards, in terms of increased productivity, reduced absenteeism and improved morale. 

For example, our study showed that financial and physical health are tightly intertwined. With only 39% of employees with a low level of financial wellness reporting being in excellent or very good health (compared to 81% at the highest level), it is easy to see how this impacts entire organizations. 

Additionally, employees who don’t feel financially confident also often spend much of their time worrying, including while at work and are also less likely to pay attention to the features of their workplace benefits and the importance of their employee compensation package. 

Employers can and should help their employees successfully manage the steps towards achieving financial confidence. Providing easy-to-access resources to help to their workforce secure retirement savings and manage investments can lead to greater employee satisfaction. It can also strengthen their employee value proposition and help to attract and retain talents. 

Reducing employees’ financial stresses 

The most effective resources should be flexible enough to help all levels of employees meet their financial goals and milestones throughout their careers. Continue Reading…