Via BC-based certified financial planner Fred Kirby comes this Marketwatch piece on ten things retirees won’t tell you. Several of the points may resonate with readers of this site, although of course our distinction between the terms “Retirement” and “Financial Independence” may make some of the points moot. We may riff off this list at some point in the future, but in the meantime also check Monday’s guest blog by Matthew Erdrey on a similar theme, and watch for a similar post on Boxing Day.
Below is Marketwatch‘s list of ten; click through on the above link for the complete piece:
1.) We’re broke.
2.) Retirement is more stressful than it looks.
3.) We spend too much time by ourselves.
4.) We’re in denial about our health problems …
5.) … and our health costs are huge.
6.) We’re coming after your jobs.
7.) We still get frisky.
8.) We’re planning to move in with you.
9.) That big Hawaii trip? It’s more like a pipe dream.
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:
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.
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
My latest blog for MoneySense.ca revisits the topic of Decumulation, a subject to which we gave full column treatment in the print magazine early in the fall. Think of Decumulation as the mirror image of Wealth Accumulation. And of course, here at the Hub we have sections devoted to both.
For one-stop shopping and archival purposes, we’re publishing the blog below as well, with some different subheads, links and the addition of an illustration and a photo of Decumulation Institute founder John Por.
By Jonathan Chevreau
With 10,000 American baby boomers turning 65 every day, plus 1,200 Canadian boomers, there is fast approaching a major sea change in how this generation handles their investments.
When you’re working, things are somewhat automatic. Your employer deposits your paycheque into your bank account perhaps every second week, conveniently withholding income taxes at source. Perhaps you’ve automated your savings program and pension contributions.
In short, you are in Wealth Accumulation mode, and so likely is your financial advisor, since he or she is also probably personally in the same mode.
The Decumulation Institute
John Por, Decumulation Institute
But once you turn 65 or cease to draw a full-time salary, you are now in the “Decumulation” zone. We devoted a column to Decumulation in the September issue of MoneySense, in which we highlighted a new undertaking by John Por called the Decumulation Institute.
Last week, I attended the second meeting of this group, which includes Malcolm Hamilton, the retired actuary who continues to be quoted by this magazine and others. Except for John and Malcolm, most of the attendees didn’t wish to be identified or quoted directly.
1,500 Canadians will retire each working day until 2034
In his progress report, Por said that by the year 2022, some $2 trillion in financial assets held by various Canadian financial institutions will be converted into retirement income. Over the next 15 to 20 years, he says 1,500 Canadians will retire each working day. Record keepers on average roll over about 30% of Defined Contribution pension assets at the retirement of the members of those plans.
Por’s research shows that bank-based advisors are “poorly trained in discussing retirement income issues,” in part because of the focus on Wealth Accumulation. Por says a mindshift is required to go from Investments to Income.
From the perspective of individuals preparing for this shift, a number of things have to be considered. These include adjusting lifestyle expectations, considering longevity risk, saving more money, taking more investment risk or simply postponing retirement.
Por has created a website at www.decumulation.ca and begun work on Decumulation Workshops that may help DC pensions, financial advisors or possibly their clients prepare for this transition.
It was Por’s pioneering work on Decumulation that prompted us here at the Financial Independence Hub to include sections on both Wealth Accumulation and Decumulation, as well as Longevity & Aging.
Advisors slow to make the leap?
In my experience, relatively few financial advisors have made this leap. One that comes to mind because he’s written a book about it is Daryl Diamond of Diamond Retirement Planning. The second edition of his book, The Retirement Income Blueprint, expertly maps out the terrain. Rogers Group Financial’s Clay Gillespie is another who has a similar focus.
Both of them are listed in the Getting Help section of the Hub (as is MoneySense’s online directory of fee-only planners). A third, who is also contributing articles on Decumulation for the site, is Doug Dahmer, of Emeritus Retirement Income Specialists in Burlington. He provides a number of tools and even games that let you run “what if” scenarios on life expectancy, inflation, timing of government benefits, tax rates etc.
Jonathan Chevreau is MoneySense’s editor-at-large and recently launched the Financial Independence Hub. (https://findependencehub.com/). He can be reached at jonathan@findependenceday.com
We’ve mentioned Mark Venning and ChangeRangers.com several times in this site as well as sister site FindependenceDay.com. His insights on Aging and Longevity are a big reason why we have included a regular section of the Hub on this topic. One of his aphorisms is particularly insightful and directly related to financial planning and financial independence: “Plan for longevity, not retirement.”
As the previous blog in this section (by Doug Dahmer) explained, the fatal flaw in most retirement plans is failing to take into account extended longevity. Mark also regularly writes on this theme, as in a recent piece on Financing Longevity, which also provides a nod to the Financial Independence Hub.
Below, specially for the Hub, Mark has composed a year-end reflection on these themes, based on his recent travels. We hope to run more like this in the new year!
Mark Venning, ChangeRangers.com
By Mark Venning,
Special to the Financial Independence Hub
Hardly a day goes by that there isn’t some symposium, book or report (not to mention a blog post or three like this one) about an aging world, longevity and retirement. You can even Google search longevity calculators that can project how long you can expect to live. It’s an aging obsession.
As Ted C. Fishman says in his 2010 book, Shock of Gray – “…although the aging world is the sum of choices made by large populations, how we navigate the future of this world – how we love and care for ourselves and those we cherish – will also be an intensely personal matter.”
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Via BC-based certified financial planner Fred Kirby comes this Marketwatch piece on ten things retirees won’t tell you. Several of the points may resonate with readers of this site, although of course our distinction between the terms “Retirement” and “Financial Independence” may make some of the points moot. We may riff off this list at some point in the future, but in the meantime also check Monday’s guest blog by Matthew Erdrey on a similar theme, and watch for a similar post on Boxing Day.
