Tag Archives: Financial Independence

Determining your Financial Independence number

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By Mark Seed, MyOwnAdvisor

Special to the Financial Independence Hub

Passionate readers of this site have long understood I’ve never been fully convinced about the “retire early” element in the Financial Independence Retire Early (FIRE) movement.

I mean really, what 30- or 40-something is never going to work for any money ever again??

(Answer = you know it.)

Surely some of them will hustle a blog, a course, a book, a podcast or other at some point. The list goes on.

Such FIRE-seekers and very early retirees are not likely misleading people on purpose: some are just simply entrepreneurs …

Forget “RE”, “FI” is the worthy goal

While I couldn’t care less about the retire early part of FIRE, I am working towards the FI part and have been doing so for at least a decade now.

I think most people should absolutely strive for FI instead of early retirement. (See this 2019 blog, Strive for Financial Independence, not Early Retirement).

How much do you need to save for any comfortable retirement?

“It depends.”

According to Fidelity, to be on track for a healthy retirement:

  • You should have x1 your annual salary saved up for retirement by age 30.
  • You should have x3 your annual salary saved up for retirement by age 40.
  • You should have x6 your annual salary saved up for retirement by age 50.
  • You should have x8 your annual salary saved up for retirement by age 60.
  • You should have x10 your annual salary saved up for retirement by age 67.

As a 40-something, according to the pros we should have at least x3-x6 of our annual savings in the bank.

I’m glad I don’t listen to Fidelity. We’re beyond that milestone and we’ll be better off financially (sooner) because of it.

Here in Canada, MoneySense did some similar work on this a while back:

 

MoneySense - how much is enough

Do you really need this much? $1 million or $1.5 million? More?

“It depends.”

I can’t tell you unfortunately: since that answer comes with a complex set of income needs and wants and everyone’s spending goals are very, very different.

I can say with a rather firm set of certainty that if any Canadian or U.S. citizen that amasses this much portfolio value by age 65 and has modest spending needs they will be far better off financially than most.

Our FI number

For years, I’ve pegged our FI number to be around the $1 million portfolio value mark not including any home equity (and our soon-to-be debt-free home: we have to live somewhere!), excluding our workplace pensions, and excluding any future government pensions such as Canada Pension Plan or Old Age Security.

I largely arrived at this number by using a rather standard FI formula.

Financial Independence means:

  1. earning enough passive income from my assets such that my asset-producing passive income is > general expenses, and/or
  2. amassing a portfolio value such that reasonable withdrawals will be > general expenses for many decades on end.

What are reasonable withdrawals???

You could argue the birth of any reasonable and therefore any safe portfolio withdrawal formula was originated by U.S. financial advisor William Bengen.

4% rule

You can read about his genesis for the 4% rule and why it still makes sense by reading this blog from earlier this year: Why the 4% Rule is (still) a decent rule of thumb.

Following Bengen and largely reinforcing his work, three professors at Trinity University published a paper about safe retirement withdrawal rates.

Those professors looked at stock and bond data from the mid-1920s through to the mid-1970s and their conclusion was that essentially over any 30-year investment period in that range, a retiree could safely withdraw 4% of their total assets per year without much fear (meaning barely any fear) of running out of money. Only in a handful of cases, the very worst cases in any 30-year period, would the portfolio go to absolute zero.

So, let’s look at that context when it comes to our goals:

If we managed to enter retirement with our desired $1 million goal of invested assets (along with no debt of course), then we could reasonably expect to assume we could withdraw $40,000 per year for our living expenses from that portfolio with very little fear of running out of money.

Henceforth, the study by those three professors from Trinity University, The Trinity Study, have set the framework for a gazillion FI number crunching exercises to this day and likely the same number into the future …

Determining your FI number 

Here are some options to crunch your math. Continue Reading…

How to reduce your Household bills

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By Jenny Hughes

Special to the Financial Independence Hub

The average American has close to $40,000 [US$ throughout] in non-mortgage debt, also known as “bad debt.” This debt will cost them close to $250,000 in lifetime interest and more than three quarters will die with unpaid balances.

It’s a tragic statistic, and it’s getting worse, which is why so many Americans [and many Canadians too!] are looking into programs like student loan debt relief, tax debt relief, and debt settlement, among others. But as effective as these programs are, the best money-saving methods begin at home.

In this guide, we’ll show you some ways to reduce your household bills, potentially saving hundreds of dollars a year, all of which can go toward clearing your debts.

Get rid of unnecessary subscriptions

North Americans are wasting vast sums of money on subscription services, most of which are underused and unnecessary. It’s such a prevalent issue, that we guarantee everyone reading this will have fallen into the same trap.

Don’t believe us? Here’s a quick test:

Without looking at your bank statements, calculate roughly how much you spend every month on digital subscription services, including TV services, online services, etc.,

If you’re like the average American, you probably calculated a total of between $50 and $80, which is respectable, but probably false.

Did you remember to include Netflix, Amazon Prime, Hulu? What about web domains, Xbox/Playstation subscriptions, loot boxes, and cloud storage services?

The problem with digital subscriptions is that they often cost just a few bucks and are purchased on a whim. The average consumer doesn’t think twice about purchasing them because what’s an extra $5 or $10 a month? But as more of these services are added, that extra $5 turns into $50, and before you know it, you’re spending $600 a year on services you don’t need.

A 2018 survey asked the same question to 2,500 participants and found a massive 84% grossly underestimated how much they spent on digital subscriptions. And this is just the tip of the iceberg, as there are also gym subscriptions, grocery deliveries, and countless other subscriptions that leech money from your bank account every month.

The trick is not to think about the monthly cost but to calculate the yearly one. $5 a month seems like a sensible choice for a new media subscription, especially if it means you can watch that new series everyone’s talking about. But what happens three years down the line when you forget to cancel and only ever watch one episode? You’ve just wasted $150 to consume 45 minutes of TV.

Make your Home more efficient

Install energy-saving lightbulbs, low-flow toilets and shower heads; fix leaky faucets; insulate your doors and windows, and stop relying on costly air conditioning units. All these tips can reduce your monthly bills, but they’re just the tip of the iceberg.

American and Canadian households are filled with electrical devices — TVs, video gaming consoles, computers — and most of these are either active or on standby. They constantly draw a charge, which means you’re paying for them around-the-clock, and those charges can add up.

When a device is not in use, turn it off. This also applies to your heating, cooling, and lighting.

Watch those Food bills

The average family spends close to $3,000 on takeout and restaurant food, and roughly $7,000 on groceries. That’s $10,000 on food, and while it’s a necessity that can’t be avoided, how that money is spent desperately needs to change. Continue Reading…

5 steps to take to retire before 40

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By Veronica Baxter

Special to the Financial Independence Hub

So you think you want to retire early? Here are five proven steps to take to make that happen, if by “retiring” you mean no longer working.

Step #1:  Work Wisely

Notice that this does not say work hard, or work 80 hours a week. To work wisely means to choose a job or a career that is lucrative and that you get some satisfaction from. You don’t have to love or even enjoy your job but you do have to tolerate it and feel a sense of self-respect in being paid to do it.

If you are still in school there are career services where you can seek counseling about what sort of careers pay well that you might be able to do and feel satisfied doing. Oddly enough, right now our economy needs more tradespeople because the boomers brought their children up to expect to go to college and get a white-collar job. As a result, there are fewer workers in trades such as plumbing, electrical, carpentry, and these people are in high demand.

Whatever you choose to do, ideally, you want to be your own boss eventually. That way you have control over the quality and quantity of work and you also have control over business expenses, which you can then keep to a minimum. Then if you can grow your business and eventually have employees work for you, you can multiply your earnings by however many people work for you. Then, eventually training someone to supervise the work means you can step back and… perhaps retire!

Whatever you decide to do, craft a 2-year plan, a 5-year plan, a 10-year plan, and a 20-year plan. These plans should include training or education goals, financial goals, and a vision of what your work life looks like at every stage. Revisit these plans in an annual self-audit to keep yourself on track, and revise them if necessary. You’ve heard of the phrase, “fail to plan, plan to fail”? Well, it’s true. Harness your imagination and dream big. Reach for the stars, you may get the moon.

Step #2:  Pay Yourself First

This is crucial. When you craft your household budget, the first expense you must pay is into your savings or retirement account. What percentage of your income you put aside is up to you, but first, you will need an emergency fund of 6-8 months’ living expenses, then you will need to put money aside for retirement.

There are online calculators that can help you figure out how much you will need to live off the income from investments, or, you can seek the advice of a financial planner to help you figure out how much to set aside and to select the right investment vehicle for your goals. Keep in mind that if you plan to retire before age 40, you will need investment vehicles in addition to traditional tax-deferred retirement plans because you will be too young to withdraw from those.

Step #3:  Live Below Your Means

Whatever percentage of your income you decide to set aside, you should figure out how to live comfortably on 80% of the remainder. Why? Because having what you perceive as “extra” money at the end of the month gives you a mental boost like nothing else. When you feel like you are in control of your finances and you have more than enough money to do what you need to do, you are activating the law of attraction.

What do you do with that “extra” money? Take a small portion and treat yourself in some small way to reward yourself for being frugal, then invest the rest in your business or deposit it in your investment accounts.

Step #4:  Maintain Good Credit

It is crucial that you pay all bills in full and on time. Take out and use credit cards, especially if there is some sort of reward for use such as cashback or airline miles, but pay them off every month. Get a car loan. Continue Reading…

How (and When) to Rebalance your portfolio

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Setting up the initial asset allocation for your investment portfolio is fairly straightforward. The challenge is knowing how and when to rebalance your portfolio. Stock and bond prices move up and down, and you periodically add new money – all of which can throw off your initial targets.

Let’s say you’re an index investor like me and use one of the Canadian Couch Potato’s model portfolios – TD’s e-Series funds. An initial investment of $50,000 might have a target asset allocation that looks something like this:

Fund Value Allocation Change
Canadian Index $12,500 25% —
U.S. Index $12,500 25% —
International Index $12,500 25% —
Canadian Bond Index $12,500 25% —

The key to maintaining this target asset mix is to periodically rebalance your portfolio. Why? Because your well-constructed portfolio will quickly get out of alignment as you add new money to your investments and as individual funds start to fluctuate with the movements of the market.

Indeed, different asset classes produce different returns over time, so naturally your portfolio’s asset allocation changes. At the end of one year, it wouldn’t be surprising to see your nice, clean four-fund portfolio look more like this:

Fund Value Allocation Change
Canadian Index $11,680 21.5% (6.6%)
U.S. Index $15,625 28.9% +25%
International Index $14,187 26.2% +13.5%
Canadian Bond Index $12,725 23.4% +1.8%

Do you see how each of the funds has drifted away from its initial asset allocation? Now you need a rebalancing strategy to get your portfolio back into alignment.

Rebalance your portfolio by date or by threshold?

Some investors prefer to rebalance according to a calendar: making monthly, quarterly, or annual adjustments. Other investors prefer to rebalance whenever an investment exceeds (or drops below) a specific threshold.

In our example, that could mean when one of the funds dips below 20 per cent, or rises above 30 per cent of the portfolio’s overall asset allocation.

Don’t overdo it. There is no optimal frequency or threshold when selecting a rebalancing strategy. However, you can’t reasonably expect to keep your portfolio in exact alignment with your target asset allocation at all times. Rebalance your portfolio too often and your costs increase (commissions, taxes, time) without any of the corresponding benefits.

According to research by Vanguard, annual or semi-annual monitoring with rebalancing at 5 per cent thresholds is likely to produce a reasonable balance between controlling risk and minimizing costs for most investors.

Rebalance by adding new money

One other consideration is when you’re adding new money to your portfolio on a regular basis. For me, since I’m in the accumulation phase and investing regularly, I simply add new money to the fund that’s lagging behind its target asset allocation.

For instance, our kids’ RESP money is invested in three TD e-Series funds. Each month I contribute $416.66 into the RESP portfolio and then I need to decide how to allocate it – which fund gets the money?

 

Rebalancing TD e-Series Funds

My target asset mix is to have one-third in each of the Canadian, U.S., and International index funds. As you can see, I’ve done a really good job keeping this portfolio’s asset allocation in-line.

How? I always add new money to the fund that’s lagging behind in market value. So my next $416.66 contribution will likely go into the International index fund.

It’s interesting to note that the U.S. index fund has the lowest book value and least number of units held. I haven’t had to add much new money to this fund because the U.S. market has been on fire; increasing 65 per cent since I’ve held it, versus just 8 per cent each for the International and Canadian index funds.

One big household investment portfolio

Wouldn’t all this asset allocation business be easier if we only had one investment portfolio to manage? Unfortunately, many of us are dealing with multiple accounts, from RRSPs, to TFSAs, and even non-registered accounts. Some also have locked-in retirement accounts from previous jobs with investments that need to be managed.

The best advice with respect to asset allocation across multiple investment accounts is to treat your accounts as one big household portfolio. Continue Reading…

Why the 4% rule is actually (still) a decent rule of thumb

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By Mark Seed

Special to the Financial Independence Hub

I’m not a huge listener to podcasts but I do enjoy them from time to time – beyond the ever popular Joe Rogan Experience that is.

Recently, I found the BiggerPockets Money Podcast with financial independence enthusiast, financial planner, along with a host of other financial designations Michael Kitces very interesting.

For an hour+ the hosts of that podcast dove deep into the simple math behind the 4% safe withdrawal rate so many investors in the early retirement community rely on, and, why Michael Kitces ultimately believes the 4% rule actually remains a very good rule of thumb to plan by.

If you don’t have an hour and 22 minutes to listen to this episode (not many people do…) then no worries, I’ve captured the essence of the interview from this solid podcast below. Kudos to the folks at BiggerPockets for the deep dive.

Let me know your thoughts about the 4% rule in the comments section. I look forward to them.

Mark

Background – what is the 4% rule???

In general terms, the “4% rule” says that you can withdraw “safely” 4% of your savings each year (and increase it every year by the rate of inflation) from the time you retire and have a very high probability you’ll never run out of money.

Some things to keep in mind when you read this:

  1. This ‘rule’ originated from a paper written in the mid-1990s by a financial planner in the U.S. who looked at rolling 30-year periods of a 50% equity/50% fixed income asset allocation. His name was Bill Bengen.

4% rule

You can find the details of the report here.

2. This rule was developed almost 30-years ago. A lot has changed since then including real returns from bonds. There are also products on the market now that allow investors to diversify far beyond the mix of large-cap U.S. stocks and treasuries the Bengen study was based on.

3. The study was designed to answer the question: “How much can I safely withdraw from my retirement savings each year and have my nest egg last for the duration of my retirement?” Little else.

4. The study assumed (at the time) most retirees would retire around age 60. Therefore, a “good retirement” would be ~30 years thereafter; what is the safe withdrawal rate to make it through retirement until death.

5. The rule takes none of the following into account:

  • Will you (or your spouse) have a defined benefit pension plan?
  • Do you expect to receive an inheritance?
  • Will you downsize your home?
  • Do you have a shortened life expectancy or health issues that should be considered?
  • Will you continue to earn some form of income in your senior years?
  • And the list of what ifs goes on and on and on

My 4% rule example:

My wife and I aspire to have a paid off condo AND own a $1 M personal portfolio to start semi-retirement with in the coming years.

If we can grow our portfolio to that value, markets willing, the 4% rule tells us we could expect to withdraw about 4% of that million nest egg (or about $40,000 per year indexed to inflation) and have virtually no concerns we would run out of money for the next 30 years (mid-70s by then).

To the podcast and my takeaways!

On the subject of a 4% withdrawal rate – is that conservative?

Michael: Yes. If your time horizon is 30-years, it probably is. Because, when Bengen looked at his different rolling periods … he found the worst case scenario was a withdrawal rate of about 4.15%. “It was the one rate that worked in the worst historical market sequence…”

Does recent data say anything different since the 1994 study?

Michael: Not really. Continue Reading…