The philosophy behind the new site was explained in the previous post about reframing the “Retirement” discussion as the emerging alternative paradigm of “Financial Independence.” That blog featured two prominent U.S.-based financial planners, Michael Kitces and Roger Wohlner (aka The Chicago Financial Planner.)
Click here to find the introductory post for what we’re calling “The Hub.” In addition to www.financialindependencehub.com there is a mirror site, www.findependencehub.com. They are the same but the latter takes fewer syllables to verbalize and fewer keystrokes to enter into your browser. Another reason to adopt the term “Findependence,” right?
There is also a new sister site devoted to audio and video content about financial independence. It’s at www.findependence.tv.
And yes, there will be discussion forums, five of them to correspond to the life cycle approach to investing contained in the two Findependence Day books and now the two new companion Kindle ebooks described earlier this week in this space.
This site will continue to exist
To clarify, the existing site will continue to exist, but chiefly as a vehicle to sell the two existing Findependence Day books, the new e-books and any other spin-off products that may be developed over the years. The new sites attempt to look at the entire topic of Financial Independence from a North American perspective, so will (hopefully) range far beyond the particular books featured on this site.
A prominent feature of the new site will be reviews of other books on Financial Independence, both by me and by guest reviewers I would love to hear from. It will also feature all the other blogs out there on the topic, even those that still bill themselves as personal finance, frugality or retirement blogs. We started with the list of Plutus award-winners that Roger Wohlner featured on his site recently.
We will also have a monthly email newsletter free to anyone who enters their email on the home page of the new site. Better get over there now, and thanks for reading!
Today’s blog title comes from Chapter 14 of The Upside of Aging, a book we mentioned several weeks ago. This is recommended reading for anyone nearing the traditional retirement age. It consists of 16 essays from various experts, all of whom look at the topic of longevity through various lenses: urban planning, global demographics, healthcare and pharmaceutical research and so on. For example, Ken Dychtwald of Age Wave pens an interesting essay titled “A Longevity Market Emerges.”
Pictured is Dan Houston, president of Retirement, Insurance and Financial Services for the US-based Principal Financial Group, who wrote the chapter I flagged in the title.
Retirees can expect one spouse to reach 90
Houston begins by observing that because of longer expected life spans, the mind-set around retirement is evolving, and for the better. “Couples age 65 now have a 45 per cent chance that at least one will live to age 90,” Houston says, citing the Society of Actuaries, “This may be the first time in history where someone spends more years in retirement than in a traditional working career.”
The downside is of course financial: living another 20 to 40 years after leaving the workplace comes with a “substantial cost,” Houston says, “one that has to be funded. It’s an increasingly challenging prospect given inflation, the high cost of health care, and the risk of outliving savings.”
Try living on $400/month
The statistics, at least in the U.S., are not encoring. Fewer than four in ten pre-retiree households (aged 55 to 70, not yet retired) have financial assets of US$100,000. And even if they did have that amount on the nose, it would generate guaranteed lifetime income of just $400 a month.
Many think they’ll need less income in later life than recommended and many plan to draw down on assets at such high rates (9% a year on average) that assets will be depleted within 13 years. The recommended “safe” annual withdrawal rate is closer to 4%. They underestimate the cost of unreimbursed health care costs: in the U.S. Houston estimates a moderately health retired couple will need US$250,000 just to cover health care expenses and premiums throughout retirement. This is one area that Canadians may be ahead because of our universal health care system.
Don’t count on working in retirement
I’ve said before that the solution to this is to “just keep working,” but of course this may not always be an option. It’s a sad fact that agism still prevails in the workplace and costly older workers may be asked to leave before they’re ready to do so; and eventually body or mind may not permit full-time work even if one can find a willing employer. Houston says pre-retirees tend to overestimate their ability to work for income in retirement: more than two thirds expect to be able to supplement retirement income with some work but in reality, only one in five retirees actually works. That statistic, Houston observers, “reflects availability of work, as well as ability to work.”
Just as disturbing is the fact that 55% of American workers, and 39% of retirees, report having a problem with their level of debt. And those who do manage to save are not saving enough: 43% of workers report that neither they nor their spouse is currently saving for the future, while 57% report the total value of savings and investments is under US$25,000.
Four key investment risks
Even where there is ample savings to invest, Houston lists for key risks: inflation, market volatility, income and longevity. These are all linked: the longer you live, the more inflation can cut into your income. Consider this alarming stat on inflation’s power to erode savings: a dollar invested int he S&P500 in 1971 grew to $2.27 by 1982 but on an inflation-adjusted basis, that dollar depreciated to 96 cents. Houston notes that even annual inflation of 3% will cut a retiree’s purchasing power in half.
This calls for investments that have a fighting chance against inflation: Houston mentions Treasury Inflation-Protected Securities (TIPS, known in Canada as Real Return Bonds or RRBs); commodities, global REITs, natural resource stocks and Master Limited Partnerships.
As if that’s not all enough to keep a retiree awake at night, Houston reminds readers that the “insolvency” date for America’s Social Security system keeps moving closer: 2033, according to Washington’s May 2013 estimate. Meanwhile the over-65 population will double between 2010 and 2050.
As has been noted elsewhere, every day 10,000 baby boomers turn 65. While Canada’s combo of CPP and OAS seems on relatively solid ground, I continue to believe the best way to prepare for a long-lived retirement is to spread your income sources around: employer pensions, savings in RRSPs, TFSAs and non-registered plans, the government plans mentioned above, some part-time work or business income and perhaps rental income from investment real estate.
It only launched last week but thanks to a link published in Rob Carrick’s Globe & Mail web roundup yesterday, A Novel Approach to Financial Independence was the #1 bestseller on Thursday in Amazon.ca’s Love & Romance category. Here’s the link to Amazon’s listing.
Love & Romance? What about personal finance? Well, I’ve always described the original Findependence Day as a financial love story so it’s not as out of the box as it may seem at first blush. Click on the blue link in the title above to find out more about the Romance plot that’s at the heart of the original novel.
The full book features a couple, Jamie and Sheena, who are 28 at the start and follows their ups and downs as a couple over 22 subsequent years. It takes a “life cycle” approach to personal finance and centers around Jamie’s declaration that he will become financially independent (“findependent”) by the time he turns 50.
There are numerous setbacks along the way, including business failure and betrayal, separation, children and more. As CTV Senior Financial Commentator Patricia Lovett-Reid says in the foreword to both the original book and the e-book, money troubles are often the cause of marital disharmony. You can read that foreword, by the way, for free because it’s near the start and Amazon lets you “look inside.”
e-book is a “Coles Notes” synopsis of the original book
The e-book pictured above is sort of a “Cole’s Notes” synopsis of the original book, summarizing the plot but focusing more on the content on financial independence. It’s short (15,000 words) but costs only C$3.37.
Amazon lets you designate purchases as gifts and with Christmas just around the corner, you have to admit it’s pretty cost-effective! Especially if you can change a young person’s life for the better, as we say in the ad below (also shown on the front page of Findependence.TV).
My latest MoneySense blog is a followup to an interesting piece by actuary Fred Vettese about the curious phenomenon of wealthy couples being able to contort their finances between ages 67 and 70, by which they can receive the Guaranteed Income Supplement or GIS.
Considering that the GIS is aimed at seniors with no savings and minimal pensions, the idea of putting such a gambit in place offends some, although as the blog points out, most of the readers who contacted Vettese just wanted more details on how they could benefit from the strategy themselves.
Hypothetical but max out your TFSA while you can
I’ll be doing more on this but it seems that the strategy is not so much likely to become widespread as it is an example of the inherent contradictions and unintended consequences that accompany such a proliferation of government programs. This one is based on suspending most sources of income from 67 to 70, except Old Age Security (OAS) and the GIS, plus taking tax-free income from the Tax Free Savings Account or TFSA. TFSA withdrawals are neither taxed nor trigger clawbacks of OAS and GIS. In fact, it’s arguable TFSAs were created expressly to motivate low-income workers to save without being penalized by the taxes and clawbacks that accompany RRSPs and employer-sponsored pensions plans.
Will Ottawa move to crack down on this theoretical loophole? Who knows but the TFSA was the Conservative administration’s creation and if they lose the next election, it’s quite possible the Liberals or NDP would move to tweak either the TFSA rules or the GIS qualifying rules. Best advice? Max out the TFSA while you still can!
I always enjoy chatting with readers of my blogs, columns and books. The other day I had an especially enjoyable dialogue with a 28 year old Winnipeg-based real estate investor named Saxon Funk. Saxon had bought the Canadian edition of Findependence Day and after a few emails introduced himself on the phone by noting he was the same age the protagonist in the book — Jamie — was when he embarked on the 22-year voyage to financial independence described in the novel.
After graduating from high school, Saxon tried door-to-door selling and selling insurance. He discovered day trading and foreign exchange trading in his early 20s but despite some success, learned that the activity was just as apt to leave him broke. Ultimately, real estate became his preferred road to financial freedom.
3-month mini-vacation in Asia
What really got my attention was the fact he had read a book featured in this blog earlier this summer: Timothy Ferriss’s The Four-Hour Workweek. Not because of my blog, I might add: Saxon read the book three years ago and actually enjoyed a three-month “mini-retirement” in Asia last year, in company with his wife.
Saxon works from home although he is still a salaried employee with one of the telecommunications giants based in the west. But he has a firm plan for achieving financial independence through various passive streams of income. Part of his search included a perusal of Ferriss’s material and Robert Kyosaki’s Rich Dad, Poor Dad, as well as this site.
Saxon is attempting to build his passive investment income through vehicles like Warren Buffett’s Berkshire Hathaway and actively managed reasonably priced mutual funds from Mawer Investment Management. But his real play for findependence comes through real estate. He started while being frustrated in a previous job and reading various books about financial freedom. He was attracted to real estate when he discovered he could buy properties at 10% down, and he caught the Winnipeg real estate cycle at just the right time. Some properties in the city have doubled and tripled since he began buying properties.
Real estate is his main path to Findependence
He’s not a member of the Real Estate Investment Network (REIN) or its rivals but Saxon could be the poster boy for any of those educational outfits. He certainly speaks their language, speaking of the 14 “doors” he owned at one point, before selling one of his buildings (a triplex) at a tidy profit. He’s now at eight doors, as he wants the stability of lower levels of debt servicing. Similar to Jamie and Sheena in the novel, he and his wife live in one of the units of the building he still owns, renting out the rest.
He’s not implemented too much of the Ferriss material, other than absorbing the power of outsourcing and technology. So he has a 1 800 number he gives to tenants and when he’s out of the country can manage his properties by outsourcing to property managers closer to home. He’s not yet down to a four-hour workweek (neither am I!) but he does have a vision of living in places like Thailand, where you can get by comfortably on a Canadian income of $1,500 a month.
He doesn’t consider himself findependent yet, but notes that if he were 65 (or 67), the combination of being debt-free, rental income and the usual government sources of retirement income (CPP, OAS), he would be able to enjoy the kind of lifestyle championed by Ferriss et al.
“I could be. We would still have food on table. I don’t worry about getting fired or let go; the main property we live in covers all our bills and puts money in our pocket. If I were 65 and qualified for CPP and OAS, yes we would be more than free but since we still have another 40 years to go; most of our money goes to giving, investing and trips. So we’re at the point where our money is all play money.”
Despite being a member of the generation that has grown up with the Internet, Saxon views himself as “an old soul” who is not totally sold by the promises of web-based freedom. He does have the beginnings of a website at www.saxonfunk.com but has yet to pursue the blogging that would be part of it.
Another millennial’s dream of Findependence
For another story of a millennial inspired by Findependence Day, read about Sean Cooper’s plan to be findependent, or at least mortgage free, by age 31. You can find it here at the new Financial Independence Hub (which was launched a week ago). And you can read a new post there about how there seems to be a trend developing here.
Today, the Canadian edition of my new “Novel Series” of e-books on Financial Independence launched on Amazon.com and Amazon.ca. You can see the full title and cover in the image to the left. Those who pre-ordered should already have it on their devices.
This is the first update to the original full novel published first in Canada in 2008, and the basis for this web site. However, it is a kind of workbook companion to the novel, and at 15,000 words much shorter.
The main body of the e-book is a chapter-by-chapter summary of the story, followed by the main lessons learned by the characters. Since it’s relatively short, the price is just C$3.37 or US$2.99. (A U.S. version of the e-book launched on Nov. 3rd.)
Remember Coles Notes?
Think of it as a “Coles Notes” (or in the U.S., Cliff Notes) for people who are more interested in the content on financial independence than the story. (Come on, admit it. Remember the time in high school when you didn’t bother to read King Lear and read only the Coles Notes version! And you still got a B!)
Or maybe you read the story once just for fun (Findependence Day, that is, not King Lear) and forgot to underline key passages containing financial lessons. This e-book is a quick refresher course and of course available on mobile devices that go where a physical book may not.
Aimed at educators, financial advisors, credit counsellors and parents
Apart from being a companion guide and refresher course for readers of the full novel, the e-books were designed for four main groups and their constituencies: teachers of finance, financial literacy or personal finance and their students; financial advisors and their clients; credit counsellors and their debt-encumbered clients; and finally parents and their children. The full books are meant to act as the “spoonful of sugar that makes the medicine go down,” the medicine being the financial lessons that have been highlighted in the short ebooks.
At its sites, Amazon provides a “Look Inside” feature that lets potential buyers sneak a free peek at the content. So you can see my new introduction, foreword and the first chapter summary. And of course, with Christmas just around the corner, Amazon also lets you specify the e-book as a gift. As you can see in our ad at the top of the new site at Findependence.TV, $3.37 is a small price to pay for something that could literally change a young person’s life. It takes just a minute to download and perhaps an hour to read.
Think that’s an exaggeration about being potentially life-changing? Read this article by a millennial who read the original novel and is now well on the way to becoming “findependent” (or at least mortgage free) by age 31.
Supplements the Novel
This ebook makes a good supplement to the novel, since it includes a few extras that were in the full U.S. edition of Findependence Day published in 2013. That includes a glossary that didn’t appear in the original Canadian novel, plus an updated bibliography of about 75 financial books from “Theo’s Kindle.” (Theo is one of two financial planner characters in the story). Most of those book listings have live links to the actual books at Amazon.
Some readers tell me they don’t own a Kindle. That doesn’t mean you can’t read these ebooks on other devices. Amazon provides a free Kindle App that lets you read Kindle ebooks on devices like the Apple iPhone and iPad, as well as the various Kindle e-readers made by Amazon.
While the U.S. edition of the full novel was available in paperback and hard cover and all e-book formats, including both Kindle and all the rest, there is still no Kindle version of the full Canadian novel. That may happen in 2015 but for those who have asked for it, we hope this new e-book is a start. And of course, it has been revised to stay current.
Why? Mister Canadian Couch Potato himself, Dan Bortolotti — now also an investment advisor for PWL Capital Inc. — explains the behavioural investment quirks that makes the simple complicated in my Wednesday blog at MoneySense.ca.
Regular readers of this blog won’t be surprised to see an installment dedicated to the difference between Retirement and my preferred term Financial Independence. However, I’m by no means the only person endeavouring to make this distinction. The other day a prominent American financial planner and influential blogger, Michael Kitces, called for a shift in focus for his profession in this essay published on his blog.
He noted that for most of its history the term “retirement” has been synonymous with “not working.” For all the pleasant imagery of golf, vacations and walking on the beach, the historical context for the term retirement was, Kitces wrote, “a mechanism to ‘force’ people out of jobs they were no longer competent to perform. Programs like Social Security were originally a way to soften the blow for those forced out of the workplace into retirement … and they weren’t expected to live long in that retirement in any case.
Total leisure may not lead to happiness
But research is showing that a total cessation of work in favor of a life of 100% leisure “does not actually create the happiness that we might have expected,” Kitces says, “Leisure as an occasional break from work is appealing, but a full-time life of leisure can become boring once the novelty wears off.”
This is exactly what Financial Post writer Andrew Allentuck once told me: Allentuck himself has passed the traditional retirement age of 65 but he continues to write a weekly Family Finance feature focused on the retirement readiness (or lack thereof) of various couples in their 50s and 60s (usually.) When I asked him about this, Allentuck said simply, “Retirement is boring” and added that self-evident truth that the more you work, the more money you have.
Kitces observes that being productively engaged in work brings about the meaning and purpose in life that fuels positive well-being. The work environment also provides a source of interaction with others to fuel our social well-being. This explains the rise of part-time work in retirement or even entire new “encore” careers on the part of those who, financially speaking, could afford never to work for money again.
The financial industry has held out the state of “not working” as the ultimate goal and reward for decades of career success, yet those that reach the retirement finish line often find themselves “unhappy and unfulfilled” after a few months or years. The words in quotes is Kitces’s phrasing, which he follows by suggesting it may be time to rename retirement.
Findependence more achievable than Retirement
His suggested alternative? You guessed it: financial independence. My own call to shift the discussion from Retirement to Financial Independence was articulated in a guest blog I wrote more than a year ago for Roger Wohlner, aka The Chicago Financial Planner, which you can find here.
Here’s how Kitces frames the discussion: “Being financially independent is about being independent from the need to work, which then opens the door to more productive conversations about whether we want to work, and what meaningful work might be.” (his emphasis).
I have noted before that for young people for whom retirement is a distant and seemingly impossible prospect, Financial Independence is a much more doable goal. Kitces says as much when he provides a nod to my book, writing that “For many, their ‘Findependence Day’ may be much more achievable than a full-on retirement, in addition to being more personally satisfying and conducive to well-being!”
But he adds that you can’t plan for financial independence until it’s identified in the first place. Addressing other financial planners and their interactions with clients, he closes: “So the next time you’re talking about ‘retirement,’ think about ‘financial independence and see where the conversation goes!”
Motley Fool podcast, new websites
Some of these themes were discussed last week on Motley Fool’s Market Foolery podcast hosted by Chris Hill, which you can find here. He closed with a mention of the US edition of my new ebook. (Note that I now also write for Motley Fool Canada, whose website is here. As per previous post, the Canadian e-book will be available on Thur., Nov. 13 but can be pre-ordered now)
Also, as detailed in November 3rd’s post, my associates and I have just launched two new websites focused on Financial Independence. By the time you read this, the initial versions should be available at www.financialindependencehub.com and www.findependence.tv. A third site, www.findependencehub.com, is a mirror site of the first one, for those who wish to save keystrokes and are comfortable with the neologism of Findependence.
On Tuesday, Amazon Kindle Digital Publishing released the first of my two new e-books, entitled A Novel Approach to Financial Independence.
These are not brand new projects but are short (15,000 words) summaries of Findependence Day (the financial novels shown on the right) and priced accordingly. First out is the U.S. e-book. A Canadian edition will be available next Thursday, Nov. 13 (date moved up from Nov. 24) but can be preordered now. Amazon’s “Look Inside” feature lets you read the forward, my new introduction and the first two chapters free.
Companion guide serves as teaching tools to full novel
The purpose of the new e-books is to act as a teaching tool or companion guide to accompany the full novels. Thus, they are aimed primarily at three groups: financial advisers working with individual investors; teachers of personal finance or financial literacy who work with students; and finally parents, who may want to use the full-length book to teach their children or relatives the basic principles of financial literacy or findependence.
The ebooks are priced at US$2.99 or C$3.37 (the minimum amount you can charge at Amazon and still qualify for maximum author royalties). (Note the Kindle version of the full U.S. edition costs $7.09 but sells for less on other e-book platforms, primarily through Trafford.com, Amazon.com and Barnes & Noble.com.)
Financial focus, but includes short plot summaries
The focus of the e-books is less on the story or novel, and more on the underlying financial principles. However, it does include short plot summaries of each chapter. It also summarizes in bullet point form the financial lessons associated with each chapter. (These end-of-chapter recaps already appear in the full U.S. edition and e-book but not in the original Canadian edition.)
The new e-books also include the glossary and bibliography from the full U.S. edition, and a new introduction by myself. The U.S. edition includes a forward written by certified financial planner Sheryl Garrett, and the Canadian edition again features a forward by CTV News senior financial commentator Patricia Lovett-Reid.
While the ebooks are for the Kindle, you don’t need a Kindle to read them: Amazon provides a free Kindle reader app that lets users of iPhones, iPads and other devices read Kindle ebooks. Amazon customers can also access the Kindle Cloud Reader, which you can find here.
Astute observers may note that the title of the ebook inverts the wording of the full U.S. book. My reasoning was that while the term “Findependence” may slowly be catching on in Canada, where the book was first published in 2008, the term is less familiar in the U.S., so the main title focuses on the more well-known phrase Financial Independence.
The ebook also includes live links to two new web sites on financial independence that are in the process of being launched in a matter of days.
Here is my MoneySense blog about Malcolm Hamilton’s talk to the Retire Rich event on the weekend.
Or you can read it here below:
Actuary and pension guru Malcolm Hamilton has already achieved what many MoneySense readers aspire to do one day: he retired at 62. But, he confessed at MoneySense’s Retire Rich on the weekend, despite his vast pension experience and gold medals in mathematics, he probably over saved. “I was cautious and now have more than I need. I have no good use for the money, although I might if we have another 2008.”
Now 63, Hamilton is mostly retired, although he is also a senior fellow for the C.D. Howe Institute and continues to do some writing and speaking. As one of the media’s go-to-sources for all things retirement and pensions, he reiterated a theme that has long been picked up by the country’s financial writers. He continues to believe most Canadians don’t need to “replace” 70 or 80% of their working incomes, which are the percentages usually proffered by our financial institutions. Most of us will be able to get by with 50% or even just 40% of what we earned in our working lives. “No one can tell exactly how much we will need to save. Canadians are unduly and irrationally discouraged about their prospects.”
Headlines downplay the good news on saving
He highlighted several pessimistic headlines produced in recent editions of our newspapers, most of them variations on the theme that Canadians aren’t saving enough. Not making the news were statistics like the fact Canadians’ collective net worth doubled from $4 trillion to $8 trillion in the 13 years between 1999 and 2012, and that’s after inflation is backed out. And that was over a period where interest rates hovered near historic lows, the stock market crashed twice and the world experienced a financial crisis almost as severe as the Great Depression of the 1930s.
Over that same time, Canadians’ retirement savings also doubled, from $1.5 trillion to $3 trillion, Hamilton said. “There’s something good going on that doesn’t seem to be reported.”
Most Canadians retire voluntarily between 60 and 65. On average they retire at 62, although that is “creeping up.” That’s not as early as most retired in the 1990s, he said, but it’s earlier than the late 1960s and 1970s, “when seniors were poor and almost no one retired at 65.”
Like Hamilton himself, most of today’s retired seniors don’t spend the money they have and own houses that are mortgage free. If they ever face financial duress, he said, they could tap the equity from those homes: renting rooms out, selling or downsizing, or resort to reverse mortgages. But most don’t do any of those things. “They live in their houses as long as they can. They don’t access home equity. They don’t withdraw money from their RRSPs as fast as possible. They continue to save as seniors.”
While the event was billed as “Retire Rich,” Hamilton said “saving for retirement is not about getting rich. If you want to get rich, you save as much as you can all the time and never spend. You live like a pauper but you won’t be happy and your marriage won’t last. Retirement saving isn’t about getting rich; it’s about finding a way to save enough of the income earned in your work life so that in retirement you can have a similar standard of living.”
Those making a minimum wage can save nothing and end up with as much disposable income in retirement as during their working lives. That’s because at age 65, the Government will give a single Ontario resident $19,000, most of it after-tax income. That consists of $7,000 from Old Age Security and $11,000 from the Guaranteed Income Supplement, $2,500 from refundable tax credits and “believe it or not” $500 from CPP, he clarified in a later Q&A session. “There is no poverty for Canadian seniors; the poor people in Canada are young.”
Why 52% replacement ratio may be fine
MoneySense subscribers attending such an event will of course be aiming for a higher retirement income. Hamilton said a typical Toronto couple with two incomes totaling $120,000 a year probably spend $480,000 on a modest house and have two kids. If they save five times their gross earnings and accumulate $600,000 in capital, they could replace 52% of their income in retirement. To get there, they’d simply need to save 6% of their income between ages 25 and 65, at which point they could retire. They would direct 23% of earnings to taxes, CPP and EI, and another 23% to pay for the house and kids. In all, 52% of their gross working income goes to taxes, savings, the house and children. At 65, all those expenditures disappear. The $600,000 capital will replace 20% of the income they were earning in their working lives, and CPP and OAS will generate 32%, for a total 52% replacement ratio. That will allow them to spend as much on themselves as they did when they were working.
Ironically, childless couples that rent will need to replace more of their working income – probably 70% — because they have been accustomed to having more disposable income. For parents, the house and kids should be the spending priorities in the first half of their working lives. They should be fine if they start to save a reasonable amount by their 40s.