Tag Archives: Financial Independence

How to Retire debt-free

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By Laurie Campbell

Special to the Financial Independence Hub

These days, don’t be surprised to find a senior citizen standing behind the counter of your favourite fast food spot taking your order instead of a braces-wearing teen. What retirement looks like today has changed quite significantly from what it was even just ten years ago, and there’s no stopping this trend. More and more seniors are staying in the workforce, and for many of them, they have no choice.

Last June for Seniors Month, our agency, Credit Canada co-sponsored a seniors and money study that looked at the financial difficulties Canadian seniors are facing; the results, while shocking, were no surprise.

As a non-profit credit counselling agency, our counsellors are on the forefront of what’s happening when it comes to people and their financial hardships, and we are seeing a large number of people who should be starting to settle into their “golden years” still working, maybe even taking on an additional side job, just to pay off their debt, let alone get a time-share in Florida.

When we conducted our study in June 2018, it revealed that one-in-five Canadians are still working past age 60, including six per cent of those 80 and older. And while one third do so simply because they want to — which is fantastic, kudos to you — 60 per cent are still working because of some form of financial hardship, whether it’s too much debt, not enough savings, or other financial responsibilities, like supporting adult children.

The truth is the golden years have been tarnished, and I don’t know if we’ll ever get them back.

Half of 60-plus carrying some form of debt

Many of today’s retirees are living on fixed incomes, making them vulnerable to unpaid debt. In fact, our study revealed more than half of Canadians age 60 and older are carrying at least one form of debt, with a quarter carrying two or more types of debt. What’s even more alarming is that 35 per cent of seniors age 80 and older have debt, including credit-card debt and even car loans.

Staring at the problem isn’t going to help, nor is hiding from it. The best thing we can all do is to face the facts head-on and devise a plan of action that we know will work, whether it’s getting rid of any debt while building up savings, taking on a side job, delaying retirement by a few years, or all of the above.

Sizing up Government support

Before delving into the numbers it’s important to understand what income you can expect to have during your retirement. A few numbers have been compiled here as an example, but if you wanted to get more detailed information you can visit the Government of Canada website and click on the Canada Pension Plan (CPP) or Old Age Security (OAS) pages.

So, let’s get started by taking a look at 2017. Continue Reading…

Retired Money: How to avoid pre-retirement financial stress syndrome

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My latest MoneySense Retired Money column looks at how near-retirees can avoid what author Patrick McKeough calls “pre-retirement financial stress syndrome.”

That’s a syndrome he identifies in his new book, Pat McKeough’s Successful Investor Toolkit. McKeough is a regular contributor here at the Hub and you can find the full MoneySense review of his book by clicking on the highlighted text: Investing tips for retired Canadians.

The book is a distillation of McKeough’s long investment career, honed first at The Investment Reporter, and in recent years his own firm, The Successful Investor, and its stable of newsletters. As a member of his Inner Circle and TSI Network, I have long been a proponent of his common-sense approach to investing. He is remarkably consistent in his insistence that investors of any age rely mostly on a conservative portfolio of quality dividend-paying stocks spread among the five major economic sectors (Manufacturing & Industry, Resources, Finance, Utilities and Consumer). And, he never fails to remind you, steer clear of stocks in the crosshairs of what he calls the “broker/media limelight.”

His newsletters are focused variously on Canadian stocks and U.S. and international stocks, and in recent years he has increased his coverage of ETFs.

A cure for PRFSS: Work longer or refine your spending

So what is“pre-retirement financial stress syndrome,” or PRFSS? PRFSS strikes when mature investors realize they may not have enough savings to generate the stream of retirement income they’d been counting on. While some investors are searching for one last desperate “hail Mary” gamble, McKeough advises the opposite: aiming for safer investments.

And while it may not be what some may want to hear, he suggests those suffering from PRFSS adopt one or both of these two solutions: work longer and/or refine your spending. He challenges them to “turn frugality into a game.”

With his focus on stocks, it’s no surprise that McKeough is not keen on bonds, even for retirees and those on the cusp of it. Continue Reading…

How to pay off your mortgage in 10 years

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By Karren Smith

Special to the Financial Independence Hub

Owning a home without a mortgage is something of a dream for many, and an important step in financial independence. Paying off a mortgage in 10 years can seem like a massive task, but with some simple financial strategies and planning, it’s possible.

While you will need to make some sacrifices, the benefits of owning your home as soon as possible is worth it for many people. By paying off your loan more quickly, you and your family will save thousands of dollars in interest and have more money to put towards the things you love, such as overseas travel, or perhaps a second home for holidays. Owning your house can help your life become freer and more flexible. So how can you escape the shackles of your mortgage and pay off your home in 10 years?

Create a simple plan

Assuming you’re debt free, aside from your mortgage, you can make a simple plan that will help you pay off your home within 10 years. For example, let’s say you have a $300,000 loan at a 5% interest rate. If you have a single income of $95,000, you can pay off your loan in 6-7 years with $2,000 fortnightly payments.

If you’re a couple, with an income of $140,000, you can pay your mortgage off in 5-6 years with $2,600 fortnightly payments.

Of course, these numbers are just a starting point to illustrate what’s possible if you focus on paying your home off. Bigger loans will require more time or bigger repayments. Obviously, the higher your fortnightly payments are, the more quickly you’ll pay off your loan; however, at the same time, it’s important that you have enough money to cover your expenses and live comfortably. Continue Reading…

Poll finds most wonder how friends or neighbours can afford lifestyles

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It’s one thing keeping up with the Joneses but a poll from Edward Jones finds that 61% of Canadians wonder how their friends or neighbours can even afford their lifestyles. This is especially so among Millennials (aged 18 to 34), 71% of whom felt this way, while 66% of Gen Xers aged 35 to 44 were curious to understand how those around them finance their purchases.

Seems to me this gives new meaning to the phrase The Millionaire Next Door, a popular book on how frugality is a key trait in building wealth. Typically, the kind of millionaires in the book live modestly and their net worth may not be obvious merely observing the size of a given home and/or what’s parked in the driveway. Conversely, it can also be that an apparent “millionaire next door” has no net worth at all but is fuelling their conspicuous consumption merely with debt.

Either way, it appears many of us are influenced by what our associates are spending their money on.

Sadly, the Edward Jones poll found that the pernicious practice of looking at the purchases of others may influence consumers to buy beyond their own budgets: a whopping 93% said they experienced buyer’s remorse after such purchases and admit to regrettable spending habits. Among Millennials, 96% experienced buyer’s remorse but so did 90% of baby boomers.

Among the types of purchases most likely to generate regret were tangible purchases, which were cited as a source of regret in 83% of cases. Clothing or shoes were regretted by 35% polled, jewelry by 28% and electronics by 26%. Millennials regretted spending on clothing/shoes in 47% of cases, while boomers were more likely to regret spending on jewelry (34% of them did).

While Millennials famously are supposed to value experiences over stuff, across the Canadian population, 83% regretted making impulse tangible purchases, versus 71% for experiential purchases.

Build spontaneous spending into your budget

So what lessons does this survey furnish for those seeking ultimate financial independence? “If you know you enjoy spending money spontaneously, build this into your monthly budget,” said Roger Ramchatesingh, Director, Solutions Consulting at Edward Jones in a press release issued on Monday, “When it is unplanned for, it can add up over time and hurt other long-term goals such as retirement or the purchase of a home.” Continue Reading…

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…