Tag Archives: Retirement

Q&A on Retirement Income with Finance prof and author Dr. Moshe Milevsky (part 1)

Posted By Financial Independence Hub | December 3, 2021

The Retirement Quant: Dr. Moshe Milevsky

By Gordon Wiebe, The Capital Partner

Special to the Financial Independence Hub

Professor Moshe Milevsky wants us to re-think the metrics we use for retirement calculations. Instead of basing retirement income amounts on our age i.e., the number of orbits around the sun, Dr. Milevsky suggests we consider using our biological age. What is your biological age?

Advances in science suggest our biological age is based on our actual physical shape or our personal physiology. Rock stars like Sting, Phil Collins and Ace Frehley were born in 1951. Their legal age is 70, but their actual condition may be substantially different from Mark Hamill (Luke Skywalker) or Dr. Jill Biden (U.S. First Lady) who also turned 70 in 2021.

The cumulative effects of genes, lifetime dietary habits, exercise, social conditions and stress levels for instance, could lengthen or decrease life expectancy and therefore provide a better indication of future retirement income needs. Recent scientific advances are helping make this information more available to seniors, advisors, researchers and policy advisors.

Background

TCP: From where does your passion for mathematics originate?

M.M. I guess it comes from my life as an undergrad. I was taking various courses including one on English literature and essay writing. I handed in an essay and received a bad grade. The professor said, “You really can’t write to save your life, you might want go into math.”

I did and I got an undergraduate degree in mathematical physics. Then, I went to graduate school and studied math and statistics, but I was really interested in gravitational physics. That was my thing, like how a golf ball moves after a drive, the arc that it makes, etc.

My thesis supervisor said, “Moshe, you’ll never find a job with that kind of specialty. You might want to go to business school.” So, I moved into business and finance and it’s where I’ve been for the past 25 years.

TCP: You also have a passion for financial history. Is there a period in history that strikes you as particularly innovative or ingenious?

M.M. There is. I’m interested in the 17th century, specifically 17th century Europe and the evolution of financial products, instruments, and economics.

Anything from the crowning of James II in 1685 until the ascension of George II in the mid-18th century.

TCP: I’m not that familiar with that era. Does it line up with the advances in math, probability, and statistics?

M.M. It does. There was this interesting alignment of people interested in mathematics and statistics and they developed the basics of probability theory, economics, and finance. It was an alignment of interests that led to many of the instruments we use today.

You know, nobody would say that 1690 was the origin of the i-Pad or the i-Phone or the laptop. But, many of the financial instruments we use, whether it’s pensions, annuities, stocks, bonds, mutual funds, they all kind of originated in the late 17^th century. You can almost trace back a direct line. I’m fascinated by that. It interests me and I’ve spent a lot of time looking at history from that period.

TCP: Among other things, the pandemic has shown how segments of the population struggle with basic math principles. Are you surprised by the lack of financial literacy?

M.M. It is a problem the pandemic has brought home. I think it’s a problem that finance has brought home. A lot of people are incapable of mathematical reasoning and that’s not healthy in today’s very quantitative, data driven environment.

Thousands of years ago, you had to make sure to out run the dinosaurs and get home in time for dinner. What did your brain have to do? Nobody was asking you to solve calculus problems.

Now, we have to evolve to deal with these very quantitative issues and make decisions and I think the pandemic has brought that home very starkly. There’s some completely irrational decision making because of a misinterpretation of probabilities and the odds. Just look at Toronto.

There are 300 infections, and everybody is walking around like it’s Ebola and every other person has it. In some sense, you have to step back and say, “Wait a minute. What are the probabilities? Do you understand all of the things you’re sacrificing?” It’s all probabilities. Those things all come down to mathematical reasoning.

I do think the educational system should focus more on some of these statistical, data driven issues. I think financial literacy is an absolute must.

My bread and butter is teaching undergraduate students at the university. Undergraduate Personal Finance. That’s a course I’ve been teaching now for almost twenty years.

It’s basic personal finance. You know. What’s a tax return? What’s an insurance policy? How does a mortgage work? What’s an RRSP?

Why do I have to teach this to 22-year-olds? Why don’t they know this from high school? Why isn’t this covered before I see them? And, why are only the ones that I teach in Business School getting this? What about the rest of the students who are studying something else? Why is this not considered a national emergency? People are wandering into the world without the requisite tools.

TCP: Carrying credit card balances in perpetuity, putting 5% down on million-dollar homes …

M.M. Let alone, just verify that what they’re paying is correct, right? Nobody’s able to do that because it’s all coming from calculations that are being done by algorithms that nobody wants to or even knows how to verify. So, there are a number of things that worry me.

The Mathematics of Retirement Income

TCP: I haven’t had a chance to watch the movie “The Baby Boomer Dilemma,” yet. I’ve just seen the trailer.

M.M. Yes, that’s an interesting one. I’m not sure how I got dragged into that, but I now have an IMDb movie rating. I am now officially a Hollywood actor (chuckling). Go figure.

TCP: On the trailer you say, “what’s been happening over the last few years is our accounts have been growing. It looks like we are getting wealthier. But, the income that we can get from that sum of money is shrinking.” What did you mean by that? Continue Reading…

How to invest for retirement when time is no longer your friend

Posted By Financial Independence Hub | November 26, 2021

By Mark Seed, myownadvisor

Special to the Financial Independence Hub

Save early, save often.

Time in the market is your friend.

Get started, stay invested.

Let’s face it: easy to say, hard to do.

How to invest for retirement when time is no longer your friend?

Read on in today’s post, including answering a reader email on this very subject.

Time in the market

Cutting to the chase: time in the market, as opposed to timing the market, works because it does not involve short-term predictions or any guesswork at all. This strategy proves that time and patience in the market is better than a quick sale. For example, when a person has a stock or ETF for many years, the power of compounding simply tells us that investment growth will do all the heavy lifting for us. Patient investors will gain larger profits by allowing their investments to grow over time.

“The wonderful magic of compounding returns that is reflected in the long-term productivity of American business, then, is translated into equally wonderful returns in the stock market. But those returns are overwhelmed by the powerful tyranny of compounding the costs of investing. For those who choose to play the game, the odds in favor of the successful achievement of superior returns are terrible. Simply playing the game consigns the average investor to a woeful shortfall to the returns generated by the stock market over the long term.” – John Bogle, founder of Vanguard Group.

John said things better than I did. Most investors should consider investing as a multi-year long-term endeavour.

The secret sauce therefore is spending time in the market – staying invested – and not diving in and out.

I’ve seen this play out myself, in real time, with my dividend investing journey. See the chart below. Sure, I’ve added new money over the years but going forward, my portfolio will continue to grow and is likely to double every 10 years or so even if I don’t add another five cents.

Further reading: read more about my progressive dividend income journey here.

Waiting for growth can be painful. Or maybe life throws a curveball at you and you simply can’t invest as much as you’d like. Life happens.

I’ve been on record to say if you haven’t saved a cent by age 50, for any retirement at all, you might be kissing any middle-class retirement lifestyle away. With inflation running higher, that might be more true than ever.

But it is never too late to right the ship. It’s never too late to learn something new. It’s never too late to get started with investing: you can invest for retirement when time is no longer your friend.

How to invest for retirement when time is no longer your friend – reader question

Here is the reader question, adaptedly slightly for the site for today’s post:

Hi Mark,

I appreciate all that you do. I recently sold a property and I’m starting all over.

I’m newly self-employed. I have a new rental apartment, but starting from scratch. I’m 55 and have an empty TFSA. I would like to max it out with investments that will act as my long-term account. I don’t need to touch that money for probably 15 years. I hope to put any savings, about $77,000 in there next year.

I’ll also be putting another $150,000-$200,000 into my new business. Day trading? Kidding.

Back to my biggest question – most articles and advice I’ve read about is focused on long-term investing that caters to a younger person whose age allows them to exploit compound interest – I know you write about that too. Because I’m not in that category, I thought I’d reach out and see what you can help with. What is possible?

Please accept my request or send me any articles on your site that address investing for someone older, with limited funds like myself for the TFSA.

Thanks so much for your time and consideration.

Thanks for your email and readership.

Well, a few thoughts and I’ll put them in order of what I would consider myself, based on my personal lessons learned as your food for thought.

How not to invest for retirement when time is no longer your friend

I’ll cover how much wealth you can still generate with your TFSA in a bit, but I think it’s important for me to call out that based on market history, because equity markets can be volatile in the short term but rather predictable over the long-term (they rise), an investor who stays invested is probably going to win the race.

Case in point.

Did you predict this massive fall, and rise, in our pandemic-era?

If you’re being totally honest with yourself, I doubt it. I know I didn’t see this comeback coming but I’m sure glad it happened ….

So, whether you invest in stocks, bonds, real estate or more speculative plays like Bitcoin, you should know that you’re mainly rewarded with returns for your exposure to just one thing: risk.

Risk, on the whole, is difficult to define and measure, especially at the personal level but essentially it comes in two main flavours: short-term and long-term.

Short-term risk might be easier to relate to. Stocks, bonds, and other assets can lose money in the short-term. See above!

But investing history consistently tells us for any short-term headaches, by staying invested, “this too shall pass.”This means that an investor who stays in the market (and does not trade) generally speaking has a much higher probability of long-term success than one who tries to pick the perfect time to get in and out.

Further reading: I used to sabotage my portfolio. Don’t repeat my mistakes!

How not to invest for retirement when time is no longer your friend

Another concept I want to bring up is the fact that at any age, there is one major piranha you need to avoid for successful, more predictable wealth-building: the investment industry itself.

Did I just call out all the entire wealth industry? Only some to a point! Continue Reading…

The six phases of financial independence [Revisited]

Posted By Financial Independence Hub | November 8, 2021

By Mark Seed, myownadvisor

Special to the Financial Independence Hub

I’ve recently updated this post to include more links to related content. I hope you enjoy it.

The term “financial independence” has many meanings to many people.

To some, it means not working at all.

To others, financial independence covers all needs and many wants.

To others still, it means the ability to work on your own terms.

Where do I stand on this subject?

This post will tell you in my six phases to financial independence.

Retirement should not be the goal, financial independence should be

Is retirement your goal?

To stop working altogether?

While I think that’s fine I feel the traditional model of retirement is outdated and quite frankly, not very useful.

As humans, even our lizard brains are smart enough to know we need a sense of purpose to feel fulfilled. Working for decades, saving money for decades, only to come to an abrupt end of any working career might work for some people but it’s not something I aspire to do.

With people living longer, and more diverse needs of our society expanding, the opportunities to contribute and give back are growing as well. To that end, I never really aspire to fully “retire” – cease to work.

Benefits of financial independence (FI)

In the coming years, I hope to realize my desired level of financial independence.

We believe the realization of FI will bring about some key benefits:

The opportunity to regain more control of our most valuable commodity: time.
Enhanced opportunities to learn and grow.
Spend extra money on things that add value to your life, like experiences or entrepreneurship.

Whether it’s establishing a three-day work week, spending more time as a painter, snowboarder, or photographer, or whatever you desire – financial independence delivers a dose of freedom that’s hard to come by otherwise.

More succinctly: financial independence funds time for passions.

FI concepts explained elsewhere

There are many takes on what FI means to others.

There is no right or wrong folks – only models and various assumptions at play.

For kicks, here are some select examples I found from authors and bloggers I follow.

JL Collins, author of The Simple Path to Wealth, popularized the concept of “F-you money”. This is not necessarily financially independent large sums of money but rather, enough money to buy a modest level of time and freedom for something else. I suspect that money threshold varies for everyone.
Various bloggers subscribe to a “4% rule”* whereby you might be able to live off your investments for ~ 30 years, increasing your portfolio withdraws with the rate of inflation.

Recall the rule:

*Based on research conducted by certified financial planner William Bengen who looked at various stock market returns and investment scenarios over many decades. The “rule” states that if you begin by withdrawing 4% of your nest egg’s value during your first year of retirement, assuming a 50/50 equity/bond asset mix, and then adjust subsequent withdrawals for inflation, you’ll avoid running out of money for 30 years. Bengen’s math noted you can always withdraw more than 4% of your portfolio in your retirement years however doing so dramatically increases your chances of exhausting your capital sooner than later.

In some ways, the 4% rule remains a decent rule of thumb.

Are there levels of FI?

For some bloggers, the answer is “yes”:

Half FI – saved up 50% of your end goal (e.g., $500,000 of $1M).
Lean FI – saved up >50% of your end goal; income that pays for life’s essentials like food, shelter and clothing (but nothing else is covered).
Flex FI – saved up closer to 80% of your end goal (e.g., $800,000 of $1M). This provides financial flexibility to cover most retirement spending including some discretionary expenses.
Financial Independence (FI) – saved up 100% of your end goal, you have ~ 25 times your annual expenses saved up whereby you could withdraw 4% (or more in good markets) for 30+ years (i.e., the 4% rule).
Fat FI – saved up at or > 120% of your end goal (in this case $1.2M for this example), such that your annual withdrawal rate could be closer to 3% (vs. 4%) therefore making your retirement spending plan almost bulletproof.

There is this concept about “Slow FI” that I like from The Fioneers. The concept of “Slow FI” arose because, using the Fioneers’ wording while “there were many positive things that could come with a decision to pursue FIRE, but I still felt that some aspects of it were at odds with my desire to live my best life now (YOLO).”

They went on to state, because “our physical health is not guaranteed, and we could irreparably damage our mental health if we don’t attend to it.”

Well said.

My six phases of financial independence

With a similar line of thinking related to Slow FI, since we all have only one life to live, we should try and embrace happiness in everything we do today and not wait until “retirement” to find it.

After reviewing these ideas above, among others, I thought it would be good to share what I believe are the six key phases of any FI journey – including my own.

Phase 1 – FI awakening. This is where there is an awareness or at least an initial desire to achieve FI even if you don’t know exactly how or when you might get there.

FI awakening might consider self-reflection questions or thoughts like the following:

I would love to retire early or retire eventually…
I can never seem to get off this credit card treadmill…
I wish I had some extra money to travel…
Wouldn’t it be nice to buy X guilt-free?

(I had my awakening just before I decided to become My Own Advisor, triggered by the financial crisis of 2008-2009.)

Phase 2 – FI understanding. This is the phase where people are getting themselves organized; they start to diligently educate themselves on what their personal FI journey might be.

In this phase, they might set goals or get a better handle on what goes into their financial plan. Even if your plan is not perfect, it’s a start.

They might start asking some deeper questions like:

Why is money important to me?
What is my money for?
How do I know I’m doing it right?

I would say it took me until my mid-30s to get my financial life in order through more financial education and improved financial literacy. It was a process that took a couple of years although I’m always continuously learning and improving. I don’t pretend to know it all.) Continue Reading…

Wealth and Happiness, Part 1: The importance of managing and using your money wisely

Posted By Financial Independence Hub | November 4, 2021

By Warren MacKenzie, for Canadian Moneysaver

Special to the Financial Independence Hub

Retirees should remember that money only has value to the extent that it can be used to increase happiness. Unfortunately, some retirees who already have sufficient wealth may miss an opportunity because they mistakenly believe that greater wealth leads to greater happiness. In this three part series we discuss the relationship between money and happiness.

In his book, The Art of Happiness, the Dalai Lama says, “The purpose of life is Happiness” Aristotle has said, “Happiness is the meaning and the purpose of life, the whole aim and end of human existence.”

Wealthy individuals have absolutely no reason to feel guilty for using their wealth to maximize
their happiness. Whether rich or poor, going to a job we hate, or to the fridge for a snack, the reason we do something is always the same: we do what we do because we believe we’ll be happier by doing it. In this regard, rich and poor people are alike.

… one big difference between a poor person and a rich person is that the poor person believes that his or her problems will disappear with more money. Wealthy people know that this is untrue.

The Importance of both Managing and using your money wisely

The main focus of the financial services industry is to increase the size of investment portfolios. However, in many cases investors would be happier if, in addition to having a larger investment portfolio, they also had a better understanding of the relationship between wealth and happiness so they get to enjoy the pleasure that comes from using their money wisely.

Don’t mistake joyful events for a Happy Life

We all want a happy life so it’s important to understand the difference between a joyful event and true happiness. Examples of joyful events include buying your first new car, weddings, purchase of one’s first home, or a spectacular vacation. But we’re lucky if we experience a few joyful occasions each year. For a happy life we also have to be able to experience happiness as we participate in the routine activities that take up most of our days.

Regardless of our level of wealth, we all spend most of our days doing routine activities such as watching the news, checking emails, or speaking to family and friends. For a happy life we need to find happiness during these routine activities. The secret is to live in the present moment, to focus intently on our activities, and by so doing we may find happiness as we do the things we need to do each day.

Unconditional happiness is when you’re so absorbed in what you’re doing that you temporarily forget about who you are or how the time is passing by. You’re not thinking about yourself and instead you’re 100% focused on what you’re doing. You may be working or watching your favorite TV program, or you’re focused on a friend or spouse. And since you’re not thinking about yourself you have no wants or unfulfilled desires, financial or otherwise, which are the only source of unhappiness.

Unconditional happiness is also known as ‘living in the moment’ or being ‘in the zone’ or a ‘flow state’. As an example, imagine you’re watching your favorite TV comedy show and it’s the funniest show you’ve ever seen. You’re laughing almost hysterically and you’re thinking of nothing except the TV show and you’re unaware of the time passing. Now you’re living in the moment! Now you’re experiencing unconditional happiness.

In the next moment, your mind kicks into gear and you start thinking, and wishing your friend was here to enjoy the show. Now the spell is broken and you’ve lost the moment of unconditional happiness. You have an idea of yourself as a friend and you wish your best friend was there to share this experience. Now you’re no longer living in the moment, instead you’re conscious of yourself and your unfulfilled desire for your friend to be with you.

We all have the same opportunity for moments of unconditional happiness and our experience is the same regardless of the size of our income or investment portfolio.

Conditional happiness is when we’re happy because of something that you’ve acquired, or some experience you’ve enjoyed. These external events might include receiving an unexpected income tax refund, enjoying a new home, when our investment portfolio increases in value, or as our candidate wins the election.

When it comes to conditional happiness, wealthy individuals have the potential to acquire more material goods and experience more travel and adventures. Therefore, in this area, they have an advantage over less wealthy people.

It’s also interesting to note that happiness research shows that, in terms of conditional happiness, there is greater long term enjoyment when we spend money on experiences such as a cruise or climbing a mountain than spending the same amount on new toys or material goods.

Recognizing opportunities for Happiness by knowing when it’s as good as it gets

Regardless of one’s wealth, similar activities usually give about the same amount of pleasure. For example, if you enjoy a cup of coffee in the morning, you should know that no amount of wealth will increase the enjoyment of your morning coffee. Continue Reading…