Tag Archives: Retirement

Shining the Light on Retirement Blind Spots (Part 1 of 2)

Posted By |

 

By Fritz Gilbert, TheRetirementManifesto.com

Special to Financial Independence Hub

We all have blind spots.

For those who are planning on retiring in the next few years, retirement blind spots can be dangerous.

Wouldn’t it be helpful…

  • …If we could get a list of our potential retirement blind spots, based on feedback from actual retirees?
  • …If we could utilize the experience of actual retirees to help shine the light on shortfalls in our planning?
  • …If someone would tell us what we should really be thinking about as we plan for retirement?

Today, we’re doing exactly that.

We’ve got a special post for you today, a post that has required hours of work by Eric Weigel, my partner on a special survey we conducted with the readers of this blog, among others. It’s the most comprehensive survey ever conducted by this blog, and you will be interested in the groundbreaking results.

After all, you are the subject!

  • If you’ve already retired, you told us about your actual experience.
  • If you’re planning on retiring, you’ve told us your expectations.

By comparing the responses of the two groups, we’ve compiled a list of potential blind spots that anyone planning for retirement should be aware of.

It’s time to put on your sunglasses.

Below, we’re shining the light on the retirement blind spots we discovered by analyzing your responses.  This is one of the longest posts I’ve ever written, but the content is invaluable.  If you don’t have time to read the entire post, skim through the charts and read the conclusion for the 5 most important retirement blind spots you helped to reveal.

Today, we’re shining the light on the most important blind spots you should be aware of as you plan for retirement. Click To Tweet

Shining the Light on Retirement Blind Spots

On March 1, 2023 you received an e-mail from me with a link to a survey, which was titled “Retirement Attitudes & Perspectives.”  In total, 1,734 people took the survey.  Most were from this blog, but we also reached out on various channels focused on retirement planning, including Eric Weigel’s page (Retire With Possibilities), The Modern Elder Academy, The Retirement Coaches Association, and personal social media pages.

Eric Weigel, author of Reimaging Retirement, developed the survey and compiled the results (a special note of thanks for the hours he’s invested in this project).  He has completed an impressive Final Report with all of the survey detail, which I encourage you to read.  The title page is presented below, which is linked to the full report.

Click on the image to read the full report

The primary goal of the research was to compare retirement attitudes & perspectives between those on the cusp of retirement to those who have already retired.  How do attitudes change pre- vs. post-retirement, and what can we learn to shed light on potential retirement blind spots for those who are approaching retirement?

To start, the following chart summarizes the demographics of respondents:

demographics for study on retirement blind spots

We were pleased that over 90% of the respondents fell in the “retirement sweet spot” (Ages 51+).  We also had a perfect blend of pre- vs. post-retirees, with 54% classifying themselves as retired, 45% planning to retire (half of whom expect to retire within 2 years), and 1% who had no plans of retiring.  70% of the responders were male, and 86% of the respondents were married.

Below are the summarized results of the survey, which will be presented as follows:

Table Of Contents

  1.  Combined Results (Both Pre- And Post-Retirees)
  2.  “Retired Only” Responses
  3.  Discovering Blind Spots – Part I
  4.  Discovering Blind Spots – Part II
  5. Which Components Lead To A Good Life In Retirement?
  6. Conclusion – The Top 5 Retirement Blind Spots

I. Combined Results (Both Pre- and Post-Retirees)

In this section, we’ll present highlights from the entire population.  In the next section, we’ll compare pre- vs. post-retiree responses, followed by a deep dive into the retirement blind spots revealed by comparing responses between the two groups.  In each of the sections, Eric and I will provide our commentary.

Ability to Manage Finances

To start, it’s important to note that our sample population was a select subset of the population at large, drawing as it did upon readers of this blog.  Our sample population is a more knowledgeable group, as demonstrated by the following chart that self-rates your  “ability to manage finances.”

Question: How would you rate yourself in terms of your ability to manage your finances?

retirement blind spots finances
For all graphs, an “A” is the highest score, and an “E” is the lowest. 

FRITZ: I like the fact that our sample was drawn from a more select group of the population. It allows you to compare yourself to a group that is more representative of your peers.  That said,  Eric and I have discussed the possibility of conducting this survey with a more representative group of the entire population, which would yield some interesting results when compared to this population of retirement blog readers.  If we are able to execute that approach, we’ll provide the results in a post dedicated to those results, stay tuned.

ERIC: I agree with you, Fritz. Our survey respondents seem to be well prepared for life in retirement. Even respondents still working and planning their retirement seem to have taken responsibility for their own well-being. While the transition from full-time work to retirement is for most people a very significant life event with its own set of challenges, our respondents seem to be ready for the challenge and well-positioned to iron out any issues that might creep up.

Strong Scores On Lifestyle & Mindset Attributes

Perhaps this is another potential impact of our sample bias, as we had a high percentage of the survey participants scoring well on the lifestyle and mindset attributes that contribute to a good retirement.

In addition to the desire to learn new things (chart shown below), our respondents also rated high in many of the areas that contribute to a good retirement, summarized below for brevity (read the Final Report for details).  Responses are sorted in descending order based on % of “A” responses:

  • Emotional Intelligence                         (A – 48%, B – 44%)
  • Life Satisfaction                                    (A – 41%, B – 46%)
  • Desire to work on meaningful goals (A – 41%, B – 40%)
  • Healthy Lifestyle                                   (A – 37%, B – 43%)
  • Quality of Relationships                      (A – 31%, B – 44%)
  • Suitability of Home & Environment   (A – 31%, B – 44%)
  • Discipline in Allocating Time              (A – 27%, B – 47%)
  • Positive Habits                                      (A – 25%, B – 49%)
  • Having A Plan For Retirement            (A – 20%, B – 47%)
  • Transferability of Vocational Skills    (A – 20%, B – 35%)

lifelong learning is a key to retirement

FRITZ: There are various personality traits that foster a good retirement, and I’m pleased to see the high scores from the participants.  All of us have to learn how to live our new lives in retirement, and embracing a desire to learn serves people well as they make the transition.  The strong scores on the other attributes are good indicators that our respondents are (and will be) leading good lives in retirement.  Each of the attributes included in the bullet list above are worth serious consideration as you finalize your plans for retirement.

ERIC: I was pleasantly surprised to see high scores across all question categories. I think that when it comes to leading a happy and fulfilling life in retirement we already know what we have to do. Of course, we all define success in our own unique ways, but the trick always seems to involve taking some sort of action that moves us closer to our goals. In a sense what makes for a successful life in retirement is not a great mystery, but fulfilling our own vision requires a commitment to using our time, energy, and money in a way that creates true happiness and fulfillment.

II. “Retired-Only” Responses

This section of the survey was designed to determine the retirement attitudes determined to be important by folks who have already retired.  In essence, it’s establishing the baseline used later in the study to compare what pre-retirees think will be important vs. what post-retirees think is important in retirement.  The larger the gap between the two populations, the higher the odds that the issue is a retirement blind spot.

How Well did you Prepare for Retirement?

Many of the questions in this section focused on preparation for retirement, with a focus on both the financial and non-financial aspects of planning.  In general, survey respondents did a good job in preparing.  We’ll touch on the financial preparation first, then provide a summary of the non-financial responses. Continue Reading…

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

Posted By |

By Mark Seed, myownadvisor

Special to Financial Independence Hub

I’m not a huge listener to podcasts but I do enjoy them from time to time …

A few years back, I listened to a BiggerPockets Podcast with financial independence enthusiast, U.S. financial planner, commentator and educator Michael Kitces as a guest.

This podcast delved into the 4% safe withdrawal rate that so many, many, many….DIY 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 – to a point. 

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 below.

In this updated post (with some new links), I share my own thinking on this subject and why I won’t use the 4% rule myself for any detailed planning work for us.

Could the 4% rule remain a decent rule of thumb?

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

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 > $1M personal portfolio to start semi-retirement with. We hope those days are near. We’ve always considered the 4% rule a decent starting point for our portfolio drawdown ideas but that’s where it ends for us.

Using that desired investment value, if we can grow our portfolio to over $1M, the 4% rule tells us we could expect to withdraw about 4% of that million-dollar nest egg ($40,000 per year indexed to inflation) and have virtually no concerns we would run out of money for the next 30 years (early 80s).

But just living off dividends or distributions (which is about 4% of our portfolio yield) doesn’t make much sense in perpetuity. I’ll come back to that point in a bit.

To the podcast and some 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. Michael and his team replicated the Bengen study and generally arrived at the same number. And that’s not the only good news … 50% of the time using the 4% rule you will as Michael puts it “double your wealth.”

So, 50% of the time (market returns willing) you will finish with almost X3 wealth on top of a lifetime of spending using the 4% rule.

“…the reality remains that by withdrawing at “only” a 4% initial withdrawal rate, the overwhelming majority of the time retirees just finish with a massive excess amount of assets left over!”

4% rule Kitces

Check out the outstanding Michael Kitces study on the 4% withdrawal rule – that shows the extraordinary upside potential in sequence of return risk.

From that post:

“…taking even “just” a 5% initial withdrawal rate (and adjusting spending for inflation in each subsequent year) actually runs out of money in nearly 25% of historical scenarios… even though a higher 5.4% withdrawal rate “worked” when projecting the lowest 30-year average returns in history!”

What if you retire at the worst possible time? Example, on the eve of the 2008-2009 financial crisis?

Michael: Doesn’t matter. 4% worked. Thanks to a massive bull run for the 10 years that followed, as bad as the 2008-2009 financial crisis was, you were still trending far ahead. Continue Reading…

The 5 factors needed for timing your Retirement, and a 6th that shouldn’t be

Posted By |

My latest MoneySense Retired Money column reprises a couple of interesting takes on the key factors in deciding one’s timing of taking on Retirement. You can read the full column by clicking on the highlighted headline here: The 5 Factors of Retirement for Canadians.

One take is from the Plutus-award winning US blogger and author Fritz Gilbert; the second a Canadian take from MyOwnAdvisor’s Mark Seed.

Gilbert started the ball rolling back in April with a blog on his The Retirement Manifesto blog, entitled The 5 most important factors in your decision to retire. Gilbert is also the author of a book on retirement: Keys to a Successful Retirement. After more than 30 years in Corporate America, Fritz retired (as planned) in June 2018 at Age 55.

Then this site, as it often does with bloggers’ permissions, re-reran Gilbert’s blog late last year. It was then noticed by Mark, who was inspired to write his own version of the blog, with more of a Canadian spin and remarks on his personal perspective. It was also republished on the Hub.

So what was it that so intrigued three different financial bloggers (I’ll count this blog and the MoneySense column as evidence that three of us found it worthy of a write-up)?

Fritz Gilbert

Succinctly, here are the five factors originally identified by Gilbert:

  1. Do you have enough money?
  2. Are you mentally prepared for Retirement?
  3. Have you made a realistic spending estimate?
  4. Is your portfolio ready for withdrawals?
  5. What’s your risk tolerance?

            By now, you may be wondering about the mysterious sixth factor which in his blog Fritz says “doesn’t really matter at all.” Strangely, he adds, many people consider it to be the most important in their decision.

            Spoiler alert: if you like a bit of suspense, read Fritz’s original blog before proceeding. For those who want the quick-and-dirty reveal, if you’ve not already guessed, it’s your age. Or as Fritz wrote: “For once in your life, age has nothing to do with this decision.  Unlike driving, voting, and drinking, there are no legal constraints on when you can choose to retire.  As long as you can check the boxes on the important factors listed earlier, you can choose to retire regardless of your age.” Continue Reading…

How much do you need to retire early at age 40, 45, 50 or 55?

Posted By |
Image courtesy Tawcan

By Bob Lai, Tawcan

Special to Financial Independence Hub

It’s never too early to start looking forward. I’ve been doing this on my site for some time and doing a bunch of assumptions and simulations on what our financial independence retire early might look like.

I also have interviewed many Canadians who are financially independent and/or retired early in my FIRE Canada Interviews.

Having some plans on your hands is better than no plans at all. Furthermore, having some quantitative targets available will allow you to set up different financial milestones and goals each year. Doing so will help you to stay focused and work your way to achieve them.

If you aspire to retire or semi-retire earlier than most people, how much do you need to retire early at age 40, 45, 50 or 55? Thanks to my friends at Cashflows & Portfolios, I have that answer today.

‘Traditional’ retirement vs. the ‘new’ retirement

For those not familiar with Cashflows & Portfolios, it’s a site started by two long time Canadian bloggers, Mark and Joe. Mark runs My Own Advisor, which I started reading before I started this blog. Joe was the brain behind Million Dollar Journey, which I have been following for over a decade.

All three of us believe we need to retire the term: retirement. To be more specific, we believe it’s time to change the ‘traditional’ definition of retirement. It is also important to make sure you know what you’re retiring to. 

Back in the day, when you turned 60 or 65, and once you had grown tired of working by already clocking decades of company time – trading those years in the workplace for your workplace pension to supplement income for your senior years.

Well, workplace pensions are dwindling and more and more, pursuing retirement in any traditional sense seems rather unhealthy today. A traditional retirement can be unhealthy physically, emotionally and financially.

On a physical level, retirement has traditionally meant a decrease in activity. You no longer have a driving reason to get out of bed in the morning, grab a coffee and get to the office – so you take it easier. That may not be beneficial to your wellness and based on my personal fitness experiences, not something that appeals to me.

On an emotional level, retirement for some could lead to social isolation. Potentially, you’ve identified and linked your self-worth to your organization, your co-workers and your manager.

Retirement means you’re leaving your workplace but the organization will undoubtedly continue to work without you being there. Unfortunately, life just works that way; it doesn’t stop for anyone. So, I believe it’s important to maintain a modest level of stimulation at any age, including retirement.

Not remaining socially engaged with other people in retirement could lead to mental health struggles.

Finally, retirement is not cheap, financially. Unless you have a workplace pension (and let’s face it, many Canadians don’t, me included!), you’ll need to rely on your disciplined, multi-decade savings rate to maximize your retirement income stream at age 40, 45, 50 or 55 – by giving up your regular paycheque.

Sure, while there are other retirement income streams to enjoy eventually, like Canada Pension Plan (CPP) and Old Age Security (OAS), many readers of this blog probably don’t want to wait until ages 60 or 65 to tap those income streams respectively.

Let’s get one point straight, it’s a privilege to be able to retire early at age 40, 45, 50 or 55. Early retirement isn’t for everyone and those who can “retire” early typically enjoy some sort of privileges in their lives. Such privileges need to be highlighted more within the FIRE community.

The reality is that you do need to have a certain level of income to build up enough assets by your 40s so your portfolio can withstand some drawdowns in the subsequent decades. A relatively high savings rate combined with a certain level of income will help and is in my opinion crucial. Continue Reading…

Why my goal to live off dividends remains alive and well

Posted By |
Image myownadvisor/honestmath.com

By Mark Seed, myownadvisor

Special to Financial Independence Hub

Some time ago…yours truly wrote a controversial post about the intent to live off dividends and distributions from our portfolio.

Well, a great deal of time has passed on that post by my thinking and goals remain the same – as least in part for semi-retirement!

Read on to learn why my approach to live off dividends remains alive and well this year in this updated post.

Why my goal to live off dividends remains alive and well

First, let’s back up to the controversy and offer a list why some investors couldn’t care less about my approach and why dividends may not matter at all to some people:

  1. The trouble with any “live off the dividends” approach is that you’d need to save too much to generate your desired income. Fair. 
  2. Dividends are not magical – there is nothing special about them. Sure.  
  3. A dollar of dividends is = a one-dollar increase in the stock price. True, a dollar is a dollar. 
  4. Stock picking (with dividend stocks) is fraught with under performance of the index long-term. I’m not convinced about that. 
  5. You can never possibly know long-term how dividends may or may not be paid by any company. Fair. 

In many respects these investors are not wrong.

You do need a bunch of capital to generate income.

Dividends are part of total return. [See image at the top of this blog.]

Stock selection can open up opportunities for market under performance.

And the negativity doesn’t stop there …

Some financial advisors will argue your investing world starts to shrink if you demand 2% or 3% (or more) income from your portfolio, so dividend investing leads to poor diversification.

My response to this: I don’t just invest in dividend paying stocks. 

Further still, some advisors will argue picking dividend paying stocks may lead to negative outcomes and too many biases.

My response to this: while I believe markets are generally efficient, I also believe that buying and holding some dividend paying stocks (while there could be market under-performance at times) does not necessarily mean I cannot achieve my goals. In fact, that’s the entire point of this investing thing anyhow – investing in a manner that keeps you motivated, inspired and helps you meet your long-term goals.

Consider this simple sketch art from Carl Richards, who is far more famous than I will be, and author of the One-Page Financial Plan and more:

Keep Investing Super Simple - Goals and Happiness

Source: Behavior Gap.

From Carl’s recent newsletter in my inbox:

“Pretend you live in some magic fantasy world where all of your dreams (according to the investment industry) come true, and you actually beat an index every quarter for your whole life. Congratulations!

So here’s my question: You landed in Shangri La, according to the financial industry. You beat the index. But you didn’t meet your goals. Are you happy?

The answer is “No.”

Now let’s flip that scenario on its head. The worst thing in the world happens to you (again, according to the investment industry). You slightly underperform the index every quarter for your whole life. But because of careful financial planning, you meet every one of your financial goals. Let me repeat the question: Are you happy?

And the answer is obviously… “Yes.”

Stop worrying about beating indexes. Focus instead on meeting your goals.”

Amen.

Finally, some advisors will argue that dividends and share buybacks and other forms of reinvesting capital back into the business can be equally shareholder friendly.

My response to this: Well of course that makes sense. Dividends are just one form of total returns.

But you know what?

The ability to live off dividends (and distributions from our ETFs) will be beneficial for these reasons:

1. I continue to believe there are simply too many unknowns about the financial future. So, living off dividends and distributions will help ensure our capital remains hard at work since it will remain intact.

2. If we are able to keep our capital intact we don’t need to worry as much about when to sell shares or ETF units when markets don’t cooperate. We can sell assets as we please over time.

3. Living off dividends is therefore just one way I’m trying to reduce sequence of returns risks. See below.

BlackRock - Sequence-of-returns-one-pager-va-us - December 2022 Page 2.pdf

Source: BlackRock.

As such, we’ll try to live off dividends and distributions in the early years of semi-retirement to avoid such risks.

4. I/we don’t necessarily believe in the 4% safe withdrawal rule. It’s impossible to predict next year, let alone 30 or more investing years.

5. I’m conservative as an investor. Seeing dividends roll into my account help me psychologically to stick to my investing plan.

6. Dividends is real money, tangible money I can spend if and when I choose without worrying about stock market prices or gyrations.

7. It is my hope dividends (and capital gains) can work together to help fight inflation. As consumer prices rise, as the cost of living rises, the companies that deliver our products and services will rise in price along with them.

8. I like dividend paying stocks for a bit of the “value-tilt” they offer. 

9. Canadian dividend paying stocks are tax-efficient. With my RRSP growing more with U.S. assets, I tend to keep Canadian dividend paying stocks in my TFSA and inside my non-registered account.

In a taxable account Canadian dividend paying stocks are eligible for a dividend tax credit from our government. This means taxation on dividends are favourable, it is a lower form of tax; lower than employment income and interest income. This will help me in the years to come.

Will I eventually spend the capital from my portfolio?

Of course I will.

But with a “live off dividends” mindset I can sell assets or incur capital gains largely on my own terms during retirement. I plan to do just that.

Why my goal to live off dividends remains alive and well summary

This site continues to share a journey that includes how passive dividend income can fulfill many of our retirement income needs – whether that might be covering our property taxes, paying our utility bills, delivering enough monthly income to cover our groceries, fund some international travel or all of these things combined.

Here was one of my recent updates below.

We’re now averaging over $3,300 per month from a few key accounts.

(Hint: likely more next month!)

We’re trending in a great direction thanks to this multi-year investing approach and I have no intentions of changing my/our overall approach.

I firmly believe our focus on the income that our portfolio generates, instead of the portfolio balance, is setting us up to deliver some decent semi-retirement income.

Our goal to live off dividends and distributions remains very much alive and well for the years ahead.

I look forward to your comments.

Mark Seed is a passionate DIY investor who lives in Ottawa.  He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally appeared on his site on March 27, 2023 and is republished on the Hub with his permission.