Tag Archives: Retirement

Misleading Retirement Study?

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Ben Carlson, A Wealth of Common Sense

By Michael J. Wiener

Special to Financial Independence Hub

 

Ben Carlson says You Probably Need Less Money Than You Think for Retirement.  His “favorite research on this topic comes from an Employee Benefit Research Institute study in 2018 that analyzed the spending habits of retirees during their first two decades of retirement.”  Unfortunately, this study’s results aren’t what they appear to be.

The study results

Here are the main conclusions from this study:

  • Individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets.
  • Those with between $200,000 and $500,000 immediately before retirement had spent down 27.2 percent.
  • Retirees with at least $500,000 immediately before retirement had spent down only 11.8 percent within the first 20 years of retirement at the median.
  • About one-third of all sampled retirees had increased their assets over the first 18 years of retirement.

The natural conclusion from these results is that retirees aren’t spending enough, or that they oversaved before retirement.  However, reading these results left me with some questions.  Fortunately, the study’s author answered them clearly.

At what moment do we consider someone to be retired?

People’s lives are messy.  Couples don’t always retire at the same time, and some people continue to earn money after leaving their long-term careers.  This study measures retirement spending relative to the assets people have at the moment they retire.  Choosing this moment can make a big difference in measuring spending rates.

From the study:

Definition of Retirement: A primary worker is identified for each household. For couples, the spouse with higher Social Security earnings is the assigned primary worker as he/she has higher average lifetime earnings. Self-reported retirement (month and year) for the primary worker in 2014 (latest survey) is used as the retirement (month and year) for the household.

There is a lot to unpack here.  Let’s begin with the “self-reported retirement” date.  People who leave their long-term careers tend to think of themselves as retired, even if they continue to earn money in some way.  Depending on how much they continue to earn, it is reasonable for their retirement savings either to decline slowly or even increase until they stop earning money.  What first looks like underspending turns out to be reasonable in the sense of seeking smooth consumption over the years.

The next thing to look at is couples who retire at different times.  Consider the hypothetical couple Jim and Kate.  Jim is 6 years older than Kate, and he is deemed to be the “primary worker” according to this study’s definition.  Years ago, Jim left his insurance career and declared himself retired, but he built and repaired fences part time for 12 more years.  Kate worked for 8 years after Jim’s initial retirement.

Their investments rose from $250,000 to $450,000 over those first 8 years of retirement, declined to $400,000 twelve years after retirement, and returned to $250,000 after 18 years.  Given the lifestyle Jim and Kate are living, this $250,000 amount is about right to cover their remaining years.  Although Jim and Kate have no problem spending their money sensibly, they and others like them skew the study’s results to make it seem like retirees don’t spend enough.

What is included in non-housing assets?

From the study:

Definition of Non-Housing Assets: Non-housing assets include any real estate other than primary residence; net value of vehicles owned; individual retirement accounts (IRAs), stocks and mutual funds, checking, savings and money market accounts, certificates of deposit (CDs), government savings bonds, Treasury bills, bonds and bond funds; and any other source of wealth minus all debt (such as consumer loans).

So cottages and winter homes count as non-housing assets.  This means that a large fraction of many people’s assets is a property that tends to appreciate in value.  Even if they spend down other assets, the rising property value will make it seem like they’re not spending enough.  It is perfectly reasonable for people to prefer to keep their cottages and winter homes rather than sell them and spend the money. Continue Reading…

Despite recession fears & inflation, DB pension health improving: Mercer

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Things appear to be looking up for members of Defined Benefit [DB] pension plans in Canada, despite inflation and rising fears of a looming recession.

In the third quarter, Canadian defined benefit (DB) pension plans continued to improve, according to the Mercer Pension Health Pulse (MPHP), released on Monday.

The MPHP, which tracks the median solvency ratio of DB pension plans in Mercer’s pension database, finished the third quarter at 125%, up from 119% last quarter. At the beginning of the year, the MPHP was at 113%, as shown in the chart above left.

This strengthening appears somewhat counterintuitive, as pension fund asset returns were mostly negative in the quarter, Mercer said in a news release. Over the quarter, bond yields increased, which decreases DB liabilities.  This decrease, along with a fall in the estimated cost of buying annuities, “more than offset the effect of negative asset returns, leading to stronger overall funded positions.”

Plans that use leverage in the fixed-income component of their assets will not have seen this type of improvement, it added.

Of plans in its database, at the end of the third quarter 88% were estimated by Mercer to be in surplus positions on a solvency basis (vs. 85% at the end of Q2). About 5% are estimated to have solvency ratios between 90% and 100%, 2% have solvency ratios between 80% and 90%, and 5% are estimated to have solvency ratios less than 80%.

Ben Ukonga

“2023 so far has been good for DB pension plans’ financial positions,” said Ben Ukonga, Principal and leader of Mercer’s Wealth practice in Calgary [pictured on right],” “However, as we enter the fourth quarter, will the good news continue to the end of the year?”

The global economy is still on shaky grounds, Mercer says.  “A recession is not completely off the table, despite continued low unemployment rates. Inflation remains high, potentially back on the rise, and outside central banks’ target ranges.”

Geopolitical tensions also remain high, reducing global trade and trust and fragmenting global supply chains – which further reduces global trade. And the war in Ukraine “shows no sign of ending – adding economic uncertainty atop a geo-political and humanitarian crisis.”

Mercer also questions whether recent labour disruptions at U.S. auto manufacturers will be resolved quickly, with Canadian workers expecting large wage increases, leading to further inflationary pressures.

Interest rates may stay at high levels

Mercer also worries that central banks globally may continue to keep benchmark interest rates at elevated levels.

 “Given the delayed effect of the impact of interest rate changes on economies, care will be needed by central banks to ensure their adjustments (and quantitative tightening) do not tip the global economy into a deep recession, as the full effects of these actions will not be known immediately. As many market observers now believe, the amount of quantitative easing during the COVID-19 pandemic was more than was needed.”

Most Canadian DB pensions are in favourable financial positions, with many plans in surplus positions, the release says: “Sponsors who filed 2022 year-end valuations will have locked in their contribution requirements for the next few years, with many being in contribution holiday territory (for the first time in a long time).”

That said, it added, DB plan sponsors should not be complacent: “Markets can be volatile, and given that plans are in surplus positions, now more than ever is the time for action, such as de-risking, pension risk transfers, etc. These actions can now be done at little or no cost to the sponsor.”

Mercer also said DB plan sponsors should “remain cognizant of the passing of Bill C-228, which grants pension plan deficits super priority over other secured creditors during bankruptcy and insolvency proceedings.”   Continue Reading…

Reasons to make Estate Planning part of your Retirement

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It’s never a bad idea to carefully organize your belongings. Discover a few important reasons to make estate planning part of your retirement process.

 

Adobe Image by Daenin

By Dan Coconate

Special to Financial Independence Hub

Retirement may feel like a distant prospect for many, but it’s never too early to start planning for your golden years.

Many people focus solely on their financial savings and investments when it comes to retirement preparations, but estate planning is another crucial element to consider. Estate planning not only protects your hard-earned assets, but it also ensures they go to your specified loved ones. Explore five essential reasons to incorporate estate planning into your retirement strategy.

Protecting your Legacy and Loved Ones

One of the main goals of estate planning is preserving your legacy after you’ve passed. A proper estate plan safeguards your assets for future generations by outlining your wishes for the distribution of your estate. This includes creating a will, designating beneficiaries for your assets, and even making provisions for minor children. By keeping your estate plan up to date, you’re setting your loved ones up for success and protecting them from legal disputes.

Avoiding Probate and Minimizing Taxes

Probate can be a long, costly, and complicated process, draining your estate’s value and leaving your loved ones in limbo. A well-crafted estate plan can help avoid probate by designating beneficiaries and establishing trusts. In addition, estate planning can minimize or eliminate the taxes your heirs will have to pay. By using smart planning strategies during retirement, such as gifting assets to heirs, you can potentially reduce estate taxes and maximize the wealth passed down to your loved ones. Continue Reading…

Were you nervous before you Retired?

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By Fritz Gilbert, TheRetirementManifesto

Special to the Financial Independence Hub

“Were you nervous before you retired?”

I was recently asked that question, and it brought back a flood of memories from my “near-retirement” days.

I suspect most of us were nervous before we retired, but it’s not something we talk about.  I believe there’s value in sharing the psychological journey in those final days before retirement.  For folks nearing retirement, it’s reassuring to know they’re not alone.

Recently I had the opportunity to talk about it with a reader who is on the cusp of retirement. We had a wide-ranging discussion and the conversation became the trigger for today’s post.  I suspect many of the questions he asked are also on the minds of other readers who are approaching retirement.

This one’s for you, Mike.  Thanks for letting me share our discussion with the readers of this blog.  I trust they’ll all benefit from our discussion…

 

Were you nervous before you Retired?

That’s one of the questions a reader, Mike, asked me on a recent phone call.  Mike’s a month away from retirement and reached out to me a few weeks ago.  I typically decline reader requests for phone calls (unfortunately, a downside of writing a blog with a large following).  If I said yes to every request, I’d be spending far too much of my time helping folks on a one-on-one basis, time that could otherwise be spent writing and reaching thousands of people with the same effort. It’s a “scalability” thing, and I trust you understand.

However…there was something about Mike.

His initial email hit a chord with me.  Here’s what he said:

Good morning Fritz,

Have heard you on several podcasts and just finished your latest discussion with Jason Parker.  I will be retiring in January and your point about helping others hit a cord.  I would love the opportunity to speak with you about your blog.  I’m currently a financial advisor and feel there is a huge need for financial literacy for just about everyone.  As a former teacher, my passion is teaching/sharing.  Would like to understand better how you got started with your blog, what are some of the watch outs, and any other insights you could provide.

Thanks for your consideration and congratulations on living your best life!

What caught my attention?  The fact that he didn’t ask a single financial question and was focused on helping others. He had some ideas about teaching/sharing and he was considering starting a blog.  I appreciate readers applying the lessons I’m sharing in their lives and searching for Purpose in retirement.  I also had a bit more free time than I usually do, so I agreed to a phone call.

Following are some of the highlights of our discussion, in no particular order.  I trust you’ll find them of interest.

how do I retire

Questions From A Soon To Be Retiree

Should I start a Blog In Retirement?

My first reaction to any question that says “Should I start…” is to say yes.  It’s critical, especially in early retirement, to foster your creative curiosity and try anything that interests you.  Many won’t “stick,” but you’ll likely find a few that do.  Once you’ve found one or two, you’re on your way to a great retirement.

Mike has a passion for teaching and is exploring various avenues to reach others.  I strongly encourage anyone who has an interest in starting a blog to give it a try.  7 years ago, I started this blog on a whim.  I’m 100% self-taught and technically inept.  It’s easy to start a blog these days, with Bluehost and WordPress both designed for folks who have never built a website.  Starting this blog is one of the best things I’ve ever done and has become a Purpose of mine in retirement. I hope it works out as well for others who are considering it.

That said, it’s important to consider your motives.  If you’re doing it to make money, I suspect you’ll fail.  For 3 years, I wrote every week without making a dime and only started adding those annoying ads when I retired.  I get some complaints about them but believe I shouldn’t have to incur costs when there’s an option of generating some revenue for my “work.” As blogs grow, the costs increase (Mailchimp costs me $220/month based on my ~13k subscribers), and I felt it was time to at least cover my costs.  Making money has never been my motive, and it shouldn’t be yours.  Even now, after 7 years, the income from this blog basically pays my health insurance.  Nice to have, but not enough to change our life. Unless you’re in the 0.1%, you won’t get rich writing a blog. Continue Reading…

Why Retirees own cash, bonds & GICs

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By Dale Roberts

Special to Financial Independence Hub

Imagine retiring, and then you have to head back to work, or you cancel your planned trips and greatly curtail your lifestyle. That’s what happened to too many who retired at or near the recesssions created by the dot com crash and the financial crisis. Risk in retirement is perhaps the flipside of risk in the accumulation stage. In the accumulation stage, lower stock prices can be very good. Lower prices in retirement can impair retirement. The equity risk in retirement is called sequence of returns risk. Poor stock market returns early in retirement can create a situation where the portfolio value has decreased, and selling more shares at lower prices might be hazardous to your retirement health. That’s why retirees own bonds, cash and GICs.

I will start off with a few charts that demonstrate the path of a retiree’s portfolio who retired at the start of the dot com crash (late 90s) and the financial crisis (2007-2009).

Here’s the drawdown history in recessions using the U.S. market as an example.

Yes, two of the most recent major corrections were epic and extraordinary. In the dot com crash and the financial crisis, stock markets were down 50%. In the early 2000s U.S. stock markets were down 3 years in a row.

The “average” decline in a recession is close to 25%. But as we know, average rarely happens when it comes to investing and stock markets.

The dot com crash retirement scenario

In the following scenario the retiree has a  C$1,000,000 portfolio and spends 4.2% of the portfolio value in year one. The $1,000,000 creates $42,000 of income. The spending rate then increases, adjusted for inflation. If inflation is 3%, the retiree gets a 3% raise.

The portfolio is 50% U.S. stocks and 50% global.

Portfolio Visualizer

We can see that it was “over” quickly for the equity portfolio in this scenario. Even the strong market returns from 2003 to 2008 could not bring the portfolio back to health. In late 2007 the portfolio value was $870,000 but the spend rate would have been considerable. We have a portfolio value much lower than $1,000,000 and the amount taken out of the portfolio has increased at the rate of inflation. It is a dead portfolio walking, even in 2007. The financial crisis essentially finished it off, and was limping through the 2010s. 2024 would be its final year.

Unfortunate start date

The retiree was a victim of bad luck. They strolled into a very unfortunate start date – at the beginning of a recession and a severe stock market correction.

Let’s head back two years to see what happens to a retiree who retired in 1998.

What a difference two years makes. That said, I would suggest that the portfolio was impaired in 2003 and 2008. It was outrageous stock market gains that brought the portfolio back to the land of the living. There is no guarantee that after 40% and 50% portfolio declines that 30% and 20% annual stock market gains will ride to the rescue.

It’s also likely that a retiree who has watched 30% to 40% of their portfolio value disappear is not comfortable keeping up the spend rate. They have cancelled trips, dinners, gifting and more. They might have self-imposed retirement withdrawal.

Risk is different and feels different in retirement.

That self-imposed retirement withdrawal may have occurred during the financial crisis as well.

Who is going to keep the spend rate when the portfolio is down over 50%? I’d suggest no one. And I’d count that as a retirement failure, having to change your retirement plans.

Are you feeling lucky?

Now, let’s give the retiree a very fortunate start date. 1991.

The portfolio never sees new lows. And obvioulsy, the retiree could have treated themself to a much higher spend rate of 4.2% inflation-adjusted. That’s called a variable withdrawal strategy. You spend more when times are very good. And you spend less during recessions. More on that later. Continue Reading…