Findependence Day: How to achieve Financial Independence — while you’re still young enough to enjoy it
Findependence is a contraction of Financial Independence, so Findependence Day is the moment far off in the future when your income from all sources exceeds the income you could get from a single employer. Henceforth, you work because you want to work, not because you have to.
The financial concepts roll out in the order of a normal human “life cycle,” proceeding from saving for college, graduating, landing a first job, enrolling in an employer pension plan, getting married, buying a first home, saving for retirement, raising children. Then the cycle resumes as you save money for the education of your children, and they need to learn the same concepts as they graduate and confront the working world.
The thrust of the novel is to impart enough major concepts that if all of the suggestions were implemented, you would achieve financial independence while you’re still young enough to enjoy it. Thus, in the book, a young couple named Jamie and Sheena want to reach their Findependence Day at the relatively young age of 50.
This is not a get-rich-quick book but is about getting rich slowly, whether through financial assets, pensions, real estate or — ideally — a combination of all of these. It takes 20 or 30 years to achieve financial independence and the book follows the couple over 22 years: hence the “financial Pilgrim’s Progress” description of one reviewer.
The book begins when Jamie & Sheena are 28 and featured guests on a financial reality TV show. Humiliated by their credit card debt before a nationwide TV audience, Jamie vows his Findependence Day will be the day he turns 50. But Sheena won’t buy into the “guerrilla frugality” habit needed to save money.
Jamie prefers stocks and financial assets and wants to be an entrepreneur. Sheena on the other hand has a comfortable teaching job and expects a generous Defined Benefit pension plan when she retires. She feels uncomfortable with Jamie’s punts on the stock market, urging him to invest instead in something more tangible, like the bricks and mortar of real estate.
Their disagreements over money escalate, as Jamie stakes everything on the big score when his hobby website attracts a big social networking site. Betrayed by his business partner, his world falls apart, threatening his dream of early financial independence.
All-American edition now available, including as e-book
In April 2013, Trafford.com published the new revised all-U.S. edition under the same title, in both hardcover and soft cover, plus most major e-book formats (just $3.99 for e-books). The plot and characters are almost the same, but the setting is entirely in the United States (chiefly Chicago, Boston, Maine and Florida). The financial content is all-American and current as of early 2013, so it’s all about IRAs, Social Security, Roth plans, 529 plans etc., with no Canadian content whatsoever. The manuscript was vetted by several American financial planners, including Garrett Planning Network founder Sheryl Garrett, who also penned the new foreword. Also new is a glossary and end-of-chapter summaries of the new financial concepts Jamie and Sheena learned in the preceding action.
Click here to purchase directly from Amazon.com, Barnes & Noble or Trafford.
Once it’s no longer necessary to commute to and from a downtown or suburban corporate job, where in the world do you want to be? I touched on this in a recent MoneySense blog on reverse mortgages. Most full retirees know they want to be close to hospitals, universities and libraries. They don’t need to be as close to the downtown core or even be near major transit systems though that can be a nice extra if they value city culture and/or friends and family still live there.
Throughout my personal Findependence journey this summer I’ve been posting photos of the community I live in: Long Branch, Ontario. It’s closer to downtown Toronto than its trendier neighbour to the west, Port Credit. The photo above, for example, I put on social media after biking along the (relatively) new boardwalk at the foot of 41st Street. As I commented at the time, at first glance you may think the photo is of some exotic beach somewhere in the south — it’s hard to believe it’s a mere 15-minute GO train ride from downtown Toronto. When I had one-hour commutes either to Don Mills or Bloor & Sherbourne, it sometimes seemed our home’s location was a bit of an inconvenience. It took a 12-minute car ride (or bus) just to get to the subway, which is why the three members of our family have three cars (though the youngest member is abroad so the car is on blocks).
Now that I’m semi-retired (that’s what I’m calling it for the balance of the summer, anyway!), I’ve really come to appreciate the community in which we live. In addition to the beach and bike paths that go from Mississauga to downtown Toronto, there’s a post office (convenient in my line of work), a library (ditto!) and quite recently a Starbucks set up shop: always a good sign for impending gentrification. The photo below of the path by the lake is the indirect route from the Starbucks to my home, during which time I generally carry back a library book or two that was on hold, and listen to podcasts. Not a bad commute!
Mind you, one couple I know on our street doesn’t like all this change and are preparing to beat a retreat for small-town Ontario. Not us: for now, this place is perfect: it’s a great base for full-time employment or part-time and if and when it comes time to “fully retire,” it has all the necessary amenities, some of which I’ve shown in scattered photos in this blog. If you’re still on the “before” end of Findependence, you might want to think about the place you want to be once you do achieve it. Hopefully this blog gives you a few ideas of what’s important.
I’ve not included photos of medical facilities but clearly that should be a consideration too: there are walk-in clinics and hospitals here. Local universities or colleges are a nice extra too: my parents enjoyed their last years in London, Ontario because they were right next door to the University of Western Ontario and took full advantage of it.
Here is my latest MoneySense blog, covering the 7 big “eternal” chestnuts of personal finance.
For continuity purposes, I also reproduce it below:
One of the world’s best personal finance writers – Jason Zweig of the Wall Street Journal – has said there are only a handful of real personal finance columns to write. The trick, he said (and I’m paraphrasing from memory), was in being able to “reissue” these columns in a way that the public (or editors) don’t notice. Of course, you could go further and say that the news business in general revolves around a few fairly standard memes: if it bleeds, it leads.
In personal finance, however, we’re not in the business of covering disasters and personal tragedies, unless of course the market does a repeat of what it did in 2008. It’s a sad fact that, as investors in Bernie Madoff’s ponzi scheme found to their regret, that when the market tanks we discover who was swimming naked.
The June issue of MoneySense contained 42 items billed as being the “Best Tips Ever.” That issue was a “keeper” and not just because it was the last one with which I was intimately involved. I’m not going to reprise the tips here but instead have come up with a list of seven “personal finance chestnuts” that I hope may be useful to readers and perhaps other PF journalists.
Chestnut #1: Live below your means
This is the granddaddy chestnut of personal finance. If you keep spending your fool head off, you’ll forever be on a treadmill to oblivion. The only way to become financially independent is to consistently spend less than you earn, year in and year out, decade in and decade out. The difference between what you (and your spouse) earn becomes your capital and it must be invested wisely.
Chestnut #2: Pay yourself first
This is closely related to living below your means. The surplus between a higher income and a lower level of spending needs to be directed to savings and investments. Just like your employer takes your income tax off your paycheque before you even see it, you should set up a pre-authorized chequing (PAC) arrangement with your financial institution (“automatic draft” in the U.S.), so another chunk of your paycheque is siphoned right off the top to savings and investments. Yes, you may feel a bit “broke” after the double whammy of paying tribute to the taxman as well as paying yourself first, but as the years go by and your wealth steadily mounts, you’ll be glad you roasted this particular chestnut.
Chestnut # 3: Get out of debt
Starting with non-tax-deductible consumer debt (aka credit cards), then student loans, and finally any lines of credit and ultimately your mortgage. (see Chestnut #4). No investment pays off as well as eliminating high-interest debt and it’s more tax efficient to boot.
Chestnut #4: Buy a home and pay off the mortgage as soon as possible
I’ll keep saying it: the foundation of financial independence is a paid-for home. If you rent, you’re still paying a mortgage: your landlord’s! In that case, your rent will never stop and will keep getting hiked as inflation rises. When you own your own home and the mortgage is gone, you get to live rent-free and you won’t worry about your rent going ever higher in old age. Plus you don’t have to pay capital gains taxes on the sale of your principal residence. (See #7 below). But do accrue for property taxes, maintenance and (for condo owners) maintenance fees.
Chestnut #5: Be an owner, not a loaner
This means owning stocks (or equity mutual funds or ETFs), instead of interest-bearing vehicles like cash or bonds. You’ll never get rich loaning money out, which is what you do when you buy a GIC (or CD in the US) from a bank. If you want to grow your capital and keep up with inflation, you need to own stocks. Better yet, dividends are taxed less than interest and capital gains taxes can be deferred as long as you don’t crystallize profits. You will want some cash or bonds in an emergency fund and as a prudent part of your portfolio once you’re near retirement age.
Chestnut #6: If your employer offers you free money, take it.
Duh! This means you should join the company pension plan, especially if they “match” whatever you put in. And if they give you a discount on the company stock, take them up on that offer too. You wouldn’t say no to a bonus or a raise, would you? Then why wouldn’t you grab the rest of the freebies when they’re on offer?
Chestnut #7: If the government offers you free money, take that too!
This is along the same lines, except of course the government seldom really gives you money, unless you’re among society’s most disadvantaged. For we more affluent folk, there’s no escaping taxes (or death) but you CAN minimize the outflow to the taxman’s grasping hands by taking advantage of whatever few tax breaks he permits. No capital gains on a principal residence is a huge tax break. Apart from that, this means maxing out your RRSP (or your IRA in the U.S.) And don’t forget the Tax-Free Savings Account (TFSA) (or the Roth in the US), which is the mirror image. In the former, you get a tax deduction upfront on contributions; for the latter, you get no upfront deduction but never have to pay tax on investment income generated, even when you withdraw it in retirement. Not quite free money, since you were taxed upfront on the income needed to generate the capital, but almost!
You may have heard the phrase “robo-adviser” but as implemented in Canada, the phrase “light advice” may be more appropriate.
Read more here in my column in the Financial Post.
For purposes of continuity and “one-stop-shopping” I’ve included the piece below, and added the minor clarification that Wealth Simple has now received regulatory approval.
The term robo-advisor has come into widespread use in recent months, with a handful of firms starting up in Canada.
The model for this is Palo Alto, Calif.-based WealthFront, founded in 2008. It describes itself as an “automated investment service.” It assembles portfolios of passively managed exchange-traded funds (ETFs), matching client investment objectives and risk tolerance to the ETF selection, with appropriate asset allocation and regular rebalancing.
The fees are low: nothing on accounts below US$10,000 and after that it bills clients monthly at a rate equivalent to 0.25% annually of assets under management (plus the fees of the underlying ETFs, many of which are from Vanguard).
Subscription-based Couch Potato service
One of the first Canadian equivalents is Toronto-based NestWealth.com, launched by Randy Cass starting in Ontario and set to roll out nationally this year. I call this a “subscription-based Couch Potato service.” Cass got the idea from watching his son watch the subscription-based Web TV service, Netflix.
For $80/month (or $40/month for those under 40) customers can “subscribe” to a service that chooses and monitors a portfolio of ETFs — selected from Vanguard Canada and Black Rock Canada’s iShares families. As with similar services, NestWealth will worry about asset allocation and rebalancing.
Wealth Simple now approved
Awaiting regulatory approval — now received — is Michael Katchen’s WealthSimple, a “light advice” model that takes a more traditional approach of levying an annual asset-based fee of 0.5%, which will be above and beyond the underlying fees of the ETFs themselves. Fees taper down with higher amounts of wealth.
SmartMoneyInvest.ca about to launch
Also about to launch is another Toronto-based firm called Smart Money Capital Management, which will operate on the web as www.smartmoneyinvest.ca. Founder and managing director Nauvzer Babul told me in an interview that “no one in this space calls themselves robo advisors. The term was coined in the United States, where everything is very automated. My goal is to be between that and where we are in the Canadian investing space, where there is advice and a person to meet with. Clients can speak with live people who try to understand their risk tolerance and understanding, then develop a portfolio around that. There’s definitely human interaction.”
At least in the Canadian model, “light advice” seems a better description than “robo-advisor.” In any case, fees will be higher than what do-it-yourself (DIY) investors would pay buying their own ETFs at discount brokerages (perhaps aided by some fee-for-service advice from a human financial planner). On the other hand, fees of these automated or semi-automated portfolio management systems should come in well below “wrap” programs offered by major Canadian financial institutions and certainly below the Management Expense Ratios (MERs) of most actively managed retail mutual funds sold in Canada.
In other words, a DIY investor might pay just the MERs of the underlying ETFs, meaning somewhere between about 0.10% and 0.55%, depending on the products chosen. Wraps and DSC mutual funds typically come in between 2.5% and 3% or a tad above that. So you can figure a typical robo-advisor or light advice service should come in somewhere between 1% and 1.5%, including the MERs of the underlying ETFs.
In the case of Babul’s firm, the annual asset-based fee charged is 0.45%, on top of the underlying ETFs, so the total portfolios should come in around or slightly below 1%, all in.
Retail investors take on too much risk picking stocks
What kind of value can investors derive from such a service? Babul provides an interesting response, drawing on his 13 years of investment banking experience at BMO Capital Markets, which he left three years ago. In managing its derivatives business, Babul developed an intimate understanding of risk management. He noticed that retail investors tend to take on more risk than institutional investors. “I believe individuals picking individual stocks are taking on too much risk. Many institutional investors are more index-based than stock-pickers because they don’t want to be exposed to undue systematic risk.”
Babul’s goal is to invest clients in diversified global portfolios of ETFs. “We’re not trying to beat the market, but just create a diversified portfolio that adequately manages their risk tolerance.”
I ask whether there was a time when Babul ever believed in market timing and stock-picking.
“I saw my portfolio’s performance.”
A big aspect of planning for retirement is health and longevity. Earlier this summer, I devoted a blog to Mark Venning of ChangeRangers.com. Venning helps clients prepare for two things: making the shift from employment to entrepreneurship, and also to help prepare for a future of extended longevity and life expectancy. That’s “why the word ‘Retirement’ doesn’t work for me. It’s about longevity planning,” he told me, “My core message is plan for your longevity, not for retirement.”
One of several book recommendations from Venning to his students is a book by Lynda Gratton called The Shift: The future of work is already here. It’s not brand new: my copy was published by Harper Collins in 2011. But it’s still relevant, especially to the generation of baby boomers, myself and Venning included, who are grappling with the issues of retirement planning.
Gratton, who is a business school professor, identifies five forces that are shaping the world of work, plus three “shifts.” They’re all worth summarizing here.
The 5 forces shaping our future
3.) Demography and Longevity
5.) Energy Resources
The 3 shifts
1.) From shallow generalist to serial master
2.) From isolated competitor to innovative connector
3.) From voracious consumer to impassioned producer
For baby boomers and others who are nearing retirement, or moving into semi-retirement or self-employment, almost all of these forces and shifts need to be taken into consideration. In earlier blogs like this one — Never Work Again — we looked at the revolution in Internet marketing, which is based on both the Technology force and Globalization. When you can run a web-based business from anywhere in the world merely with a laptop computer and a smartphone, you know you’re embracing these forces.
Gratton’s points on demography and longevity seem particularly apt: this was the topic that most fascinated the team of researchers she tapped into for the book. “We quickly understood that technology is changing everything and will continue to do so, and that natural resources are depleted and carbon footprints must be reduced,” she writes. But demography and longevity “is intimately about us, our friends and our children … It’s about how many people are working, and for how long.”
The dark side: some boomers will grow old poor
In 2010, when Gratton was writing the book, there were four distinct generations in the workforce: the Boomers’ parents, the Boomers, Gen X (born between 1969 and 1979) and Gen Y (1980 to 1995). And coming up is Gen Z, born after 1995. Gen Y will be ascendent in the workplace by 2025 but increasing longevity means the Boomers and Gen X will still be hanging around, wanting to work and contribute in some capacity well into their 60s, if not beyond. Gratton also warns that “some baby boomers will grow old poor,” particularly if they don’t respond to the gift of extended longevity by embracing the forces and shifts that are confronting them.
Because of globalization and technology, the privilege of being born in North America may no longer be sufficient advantage for those who don’t embrace The Shift. Books like The Laptop Millionaire describe how those with wealth can take advantage of outsourcing: for example, hiring English-speaking Filipinos as full-time virtual assistants for something like $250 or $300/month. There is a dark side to these shifts: those not equipped to embrace change increasingly will have to compete for jobs or contracts with people half a world away who are technologically sophisticated and willing and able to work for much less than North Americans.
Gratton devotes big chunks of the book to fictional scenarios of the near future of work, some of them pessimistic, some of them optimistic. All in all, it’s well worth reading. It reinforced my own belief that “If you’re not sure whether you should retire or can afford to do so, then just keep working, preferably in a congenial line of work you can continue to practice well into your 70s.”
Here is my latest MoneySense blog on Financial Independence.
For convenience and archival purposes, I’ve entered a version below:
I’ve always had ambivalent feelings about the expression “sandwich generation,” which was in the news again last week when BMO Nesbitt Burns put out its latest “retirement readiness” study.
The headline number was that those caught between child-rearing and eldercare will be short more than half a million dollars for their own retirement. Defining this generation as those between the ages of 45 and 64, it said this cohort believes they need $818,000 on average for retirement but to date most have saved on average just $258,000.
Why my ambivalence? On the plus side, the sandwich generation always makes for good copy. In fact, the never-published fifth issue of the old Wealthy Boomer magazine I used to be associated with featured just such an anguished baby boomer couple on the cover, complete with squalling kids and ailing parents.
‘Twas ever thus?
On the other hand, I can’t help thinking “Hasn’t EVERY generation” been a sandwich generation? Didn’t the parents of the baby boomers have to raise us and worry also about THEIR aging parents? And didn’t their grandparents go through the same thing, and so on throughout all recorded time?
Ah but the baby boomers are special, aren’t they? Everything we touch becomes a trend and any asset class we embrace soon becomes overheated. Housing in the 1980s. Tech stocks in 2000. Soon perhaps a rush for vacation properties and retirement homes.
I accept the argument that the boomers have been blessed by extended longevity and generally robust health and new medical breakthroughs. Even so, I don’t see why an extra ten years of life expectancy makes the current crop of Sandwichees more special then previous generations. Arguably, the previous generation married earlier than the boomers. I’d even make the case that the boomers generally married and started forming families roughly ten years later than their parents did: say on average at age 29 instead of 19. Let’s also assume that we have ten years more life expectancy. Seems almost a wash, except that we have kids when we’re older. The old folks will pass away at their appointed time, regardless of when we decide to start replacing them with their grandchildren.
In my case, I’m particularly fond of a photograph of my own father taken with our daughter as a youngster. Perhaps Dad was in his mid 80s at the time (he’d be 100 this year had he lived that long) and Daughter was maybe three. In effect, neither of them as photographed there is here any longer. I couldn’t find that photo but the one above shows my late father-in-law and mother-in-law, holding my daughter and one of her two cousins, taken about 20 years ago. Literally, “grandchildren on your knee,” as per the line from the Beatles’ When I’m 64.
The young girls are now young women. The point is that period was a fleeting one and so too was the period of being “sandwiched.”
This phase too will pass
The kids soon grow up and the parents die: all four of our precious elders in our own case. Because we delayed things like so many boomers did, the grandparents weren’t around to see things like college graduation or marriage for their grandchildren. But with their passing comes inheritances (often), which in turn can help pay for the kids’ university educations. The one “problem” (eldercare) eventually resolves itself and helps fix the other sandwich “problem” of the cost of university.
I’ve always loved Emerson’s essay, Compensation. If you’re still a boomer sandwiched between the generations, count your blessings and read that essay. Here’s a passage I underlined long ago: “For every thing you have missed, you have gained something else; and for every thing you gain, you lose something.”
The compensations of being sandwiched
To those still sandwiched, I’d say enjoy this brief time where you bridge three generations. Soon it will be gone and you’ll have plenty of time to pad your retirement savings, especially with extended life expectancy. Take it from me: working a few extra years is no tragedy. Emerson might even view it as a blessing.
I’ve long argued that the best tax shelter out there is the Roth IRA in the United States and its equivalent launched in Canada five years ago: the Tax Free Savings Account or TFSA.
Now, you could argue your own business is superior tax shelter and possibly a principal residence. But for ordinary folk earning salaries I still prefer TFSAs or Roths. Note that in Findependence Day, depending on whether it’s the Canadian or US edition, TFSAs and Roths get a lot of space.
The reason why can be based on the original term for the TFSA before it was finally unveiled in 2009: Tax PrePaid Savings Plans or TPSPs. The problem with RRSPs or IRAs is that while you get an alluring tax deduction up front, one day the piper has to be paid: in retirement, with traditional RRSPs/RRIFs and their American equivalents, you have to pay tax on withdrawals, just as you must with traditional employer pensions.
Tax-prepaid means no double taxation
Not so TFSAs and Roths. As the original name suggested, the tax has been PRE-PAID. What does that mean? In Canada, to contribute the annual $5,500 permitted into a TFSA, a top bracket earner might have to generate $7,000 of earned income, paying roughly $1,500 in income tax, and THEN contribute the remaining $5,500 into the plan.
But having done so and paid tax once, you’re now free and clear: there’s no double taxation, as is the case in taxable or “non-registered plans.” And that’s why I think they’re a good idea, but only if you take the trouble to optimize them and maximize their long-term growth. And remember, not only do you not pay tax when the money is withdrawn, but you also never pay tax on the interest, dividends and capital gains generated in the plan.
There are many great things about being self-employed. On the other hand, the two biggest things I miss about salaried employment is paid vacations and in-house tech support from the much-aligned “IT department.” Guys, I miss you!
As I am rapidly discovering in this my second incarnation as an “independent writer” (sounds so much better than freelance, doesn’t it?), when it comes to technology, a small business is pretty much left on its own.
In the bad old days of robber baron capitalism, most workers depended on a big well-capitalized employer to provide the so-called “means of production.” Here in the 21st century, technology has become so pervasive and affordable that anyone who hangs out a shingle now has the means of production at hand.
Life without the I.T department
Only problem is, when something doesn’t work out the gate – usually soon after purchase – there’s no corporate I.T. department to deal with technical SNAFUs. When you have to deal with a technology issue involving computers, the Internet, peripherals and all the rest of it, you’re either going to have to do it yourself or pay someone to help you. In the first case, you’ll need time and expertise; in the second, you’ll need money.
Last Saturday, I wandered first into Future Shop and then into Best Buy in search of an affordable monitor to hook up to my MacBook Air. I had the wireless mouse running and the split keyboard, and life was going to be just grand if I could just find a reasonably priced large monitor. They have an Apple department embedded within Best Buy and I was assured an Acer or HP monitor would do the trick: Apple’s own dedicated monitors are prohibitively expensive. The part of me that is an Apple shareowner likes that, but as a consumer? Not so much.
So I talk to a Best Buy salesperson. I don’t think they are paid commissions because he wandered off half way through the sale. I hunkered down with my iPhone and waited for his return. When he finally rematerialized, he assured me that an HP Pavilion monitor would do the trick. Just to make sure, I went back to the Apple booth to double check.
No problem from Apple’s perspective, but by then my friendly salesperson is again nowhere to be seen. I go to checkout and buy it anyway. I unbox it at home and discover the CD-ROM is only for Windows, not Mac. Doesn’t matter, I’m later told. I hook it up as best I can but just can’t get the Mac display to correspond precisely to the HP monitor. I put up with this for a few days, constantly having to switch my gaze between the laptop display and the HP monitor, since the latter isn’t quite picking up the top inch and the left-side half-inch of what appears on the Mac. This pretty much defeats the purpose of having the bigger monitor so I go back to Best Buy and ask for a solution. Just resize the Resolution, the Geek Squad guy tells me, although he’s not quite sure it’s to be set higher or lower. I go home and try every which way to make this work but get no satisfaction. My day is being consumed and I decide to make it my top priority for what’s left of it.
Service? Sure, but it’s going to cost you
Remember, I bought the monitor on Saturday and it’s now Tuesday as write these words. I go to geeksquad.ca and dial phone support. A not overly friendly woman at the end of the line tells me they’re a paid service and it’s going to cost me $60. The monitor only cost $200 in the first place but it appears the price just went up 30% if I actually want it to work. I’m pretty certain this is a simple fix if I can just find out what it is. I argue that the equipment is not doing what the salespeople told me it would do three days earlier, so why should I pay? Sorry, I’m reminded, it’s a paid service. I don’t play the media card but do mention social media, which fazes her not a bit. I hang up, getting frustrated.
Same attitude at Apple
“Ah ha,” says I to myself, “I’ll try Apple.” Over to the Apple site and it’s looking promising. I go to the Display part of the Help section and am told to enter the serial number of my Apple device. It even tells me how to find it. I enter it, anticipating the imminent delights of a large monitor that shows everything my computer does. But no, apparently my two-year old Mac Book Air is no longer supported, based on the serial number I entered, and that will be $60 if I wish support. I don’t wish it and go back to the drawing board, making repeated calls to the Best Buy store from which I bought the monitor.
No one answers from the Geek Squad so I try the Sales department. Now it’s getting a bit better. I get a partial answer that still doesn’t work, so finally I’m told to bring both laptop and the monitor in. Problem is the Apple guy isn’t working that day. By now, I’m determined to fix this problem TODAY, even if I accomplish nothing else. Besides, I think, I can at least get a blog out of it, which you’re now reading. Oh, I’ve also fired up an angry tweet about this experience, which has gotten a bit of traction, including from Best Buy Support.
Trip #3 to Best Buy
I trundle up the gear in my car – not even using the original and by-now soggy packaging – and go back to the Best Buy outlet for the second time that day. Finally, a long-suffering Geek Squadder deals with it. At first, he’s a bit baffled too but after five minutes he finally figures it out. That’s me done and he instantly switches his attention to the next frustrated customer. I carry the stuff back to the car, set it up again in my home office and bang out the first draft of this blog.
Now I’m doing a final edit on the big screen and you know what? After all, I’m happy, plus I got this blog out of it. The lesson? I should have gotten the original salesperson’s card and hounded him. Don’t cave in at the first request for extra money to support a product sold less than a week before. And for the vendors, how about a little post-sales followup to make sure the promises you made to customers actually materialized? If they didn’t, don’t be so quick to demand more money to fix what should be a simple problem.
Here is my latest MoneySense blog on this topic. For archival and continuity purposes for those frequenting this site, I’ve reposted the text below, adding new subheads and links:
Bill Bengen sure started something!
If there’s one topic guaranteed to get the attention of retirees and would-be retirees, it’s the 4% “safe” annual withdrawal guideline popularized by the American financial planner, William Bengen. Illustrated is the cover of his seminal book, Conserving Client Portfolios During Retirement. ˚ (Yes, I own it and have read it!)
I alluded to this last week when I wrote about Wes Moss’s “The 1,000-Bucks-a-Month Rule” rule. (For every $1,000 of monthly retirement income you need $240,000 capital to generate it.) In the book in which Moss revealed this guideline, he clarified that his rule was based not strictly on Bengen’s 4% guideline (plus inflation adjustments) but on a 5% annual withdrawal made up in part from high-yielding “income” investments (like dividends), and partly from a combination of capital gains or breaking slowly into capital.
Here in Canada, whether you’re talking 4% or 5%, things are complicated once you reach your 70s by the fact Ottawa insists on minimum annual withdrawals from Registered Retirement Income Funds (RRIFs) that start at 7% and move sharply higher as the years pass. That’s a topic for another day but suffice it to say that if you’re forced to withdraw 7% a year and are only earning 3% or 4% or 5%, you’ll likely start to dig into capital.
4% is for those who never want to break into capital
Canadian actuary Fred Vettese (chief actuary for Toronto-based Morneau Shepell) tapped into this nerve in July when he wrote in his column in the Financial Post that “the good news about the 4% withdrawal rule is that it might be too low.” The piece generated dozens of comments, many of them quite insightful. Vettese, who is also the author of The Real Retirement, noted that the 4% rule is for people who never want to break into capital. But in his “real” retirement, there’s a balance between running out of money altogether and dying with a giant nest egg destined to cheer up some combination of your heirs and the Canada Revenue Agency. Most will opt for a nest egg that’s “somewhere in between” these extremes.
Is 3% more like it in a low-return climate?
In an interview, Vettese told me he wrote the piece after giving interviews on the subject to various media outlets about a truly “safe” withdrawal rate. “Everyone in the market said it used to be 4% but now it’s closer to 3% with lower returns and interest rates.” Indeed, in another FP article on the weekend, Michael Nairne, president of Tacita Capital Inc., invoked the same rule, noting that back-testing to 1926 found that for balanced portfolios (50% stocks, 50% government bonds), the 4% rate would last at least 33 years and usually at least 50 years. But in the modern era of low interest rates and richly valued stocks, Nairne says more recent studies find the 4% rate will see portfolios run out of money in under 30 years. Therefore the “safer” withdrawal rate is closer to 3%, Nairne says.
But remember that’s if you never want to deplete capital. Vettese says “no one I know says they want the capital they have at retirement growing in real terms. The 4% rule only makes sense if you’re trying to keep your nest egg intact over the long term.”
Take gains from good years and save them for the bad ones
As Moss notes, in real life there’s volatility. While you may want to draw 4% or 5% on average each year, sometimes the financial markets will do great and you’ll enjoy 10% annual returns on your portfolio; on the flip side, there will be years when it loses 2%. Knowing this, Vettese says retirees shouldn’t spend the entire 10% gains in the good years, since they need to hold back some of the gains so you’ll still be able to pull out the 4% in the bad years. He assumes living to age 90.
Vettese also has some interesting thoughts on annuities. We’ll save them for a future post.
Now that a few months have passed since my “Findependence Day” arrived in May, I’ve gotten more clarity about some misconceptions some may have about this concept. I may even have harboured some of these myself at one point in my full-time career. Here are five myths I’ve become aware of: this is not necessarily a definitive list and may be revisited in the future.
Myth 1 After you’re findependent, you’ll play golf all day, or bridge, or read, or travel.
I doubt this will happen for many unless you really burned out in your career. Depending on the degree of your findependence (see my recent MoneySense blog on this) and how much work you wish to do, you’ll soon settle into a routine. Most of your tasks may be self imposed, but impose them you will! Between 2004 and 2011 or so, while still working full time at the Financial Post, I devoted many nights and weekends playing to online bridge. Oddly, now that I have more time, I no longer play online bridge, although I do make a point of religiously reading Paul Thurston’s bridge column every day on the “Diversions” page of the National Post. Even with no time lost in a downtown office and getting to and from it, I still don’t have time for online bridge. I may resume once I’m “fully retired” later in my 60s but I can’t seem to find the time for it in semi-retirement!
Myth 2: There’s no distinction between weeks and weekends.
For me, at least, the week and weekend routine still operates at most levels. If you’re familiar with my concept of the 4-hour day (normally practiced from Monday to Friday), then on weekends I do not feel obligated to put in either a four-hour or even just one two-hour stint on money-making or creative activities. Of course, you could redirect at least two hours per weekend from money making to creative fun long term projects you’ve always wanted to accomplish. Because at the end of the weekend, once the workweek resumes for everyone else, longer term projects tend to get crowded out by more imminent matters and deadlines. That said, it’s also true that – at least if you work from home – you tend to attend to some errands like shopping in the workweek lunch hour, if only as a break and a way to get out of the house. So instead of a large weekend grocery shop, I tend to run two or three times a week on specific shopping missions, but add in a few items I know we’ll need soon. The grocery bills tend to be lower on any given shop but of course you’ll have plenty more of them.
Myth 3: Findependence is an all-or-nothing proposition involving a certain “Big Number.”
Ah, big numbers. Lee Eisenberg wrote a bestseller on that called The Number. If your initial Number was $X million or $Y100 thousand, you may find you continue to push even once it’s achieved. It may become 2X or 3Y. The moment you can declare findependence may be a moving target, depending on financial markets, employers, health and many other considerations. You need to be flexible.
Myth 4: The government won’t be there for me (or employer pensions).
I think whether in Canada or the US that the boomer generation can count on the promised social programs and probably the same will hold for succeeding generations. Benefits may not be as generous, may not be inflation hedged, may become means-tested and so on. And yes, these days, it’s hard to count on any one employer pension plan, be it Defined Benefit or newer hybrids that expose workers to some market risk. The whole point of findependence is to establish multiple income streams, which may include part-time earned income or consulting work. That’s a major point Wes Moss makes in his excellent book: You Can Retire Sooner Than You Think.
Government pensions is one basket and an employer pension is a second one but you know what they say about putting all your eggs into any one of them. If I were counting 100% on Social Security or OAS/CPP in Canada then I’d be apprehensive about this. And Moss finds the unhappiest retirees are those who can count on only a single source of income.
But as a single potential flow of income that might account for 20 to 60% of the total, the more you have alternatives, the better. RRSPs/IRAs and other savings are one other vehicle, as are taxable accounts and TFSAs/Roth IRAs. But there are also book or music royalties, real estate investment properties, part-time work and finally the subject we wrote about here last week: Internet marketing and entrepreneurship. The Internet has so much potential for creating multiple streams of findependence income that I almost envy the young people now who would far rather become laptop millionaires than salaried employees.
Myth 5: The act of declaring Findependence is irrevocable.
If you’ve left a job or sold a business, you may think the act of declaring your Findependence is irrevocable. It’s not. The truth is you can rejoin the workforce if you wish, though most of the “findependent” people I know who got there before me show not the slightest inclination for returning to another stint on the 9-to-5 treadmill. Lately, I’ve been listening to a Valdy song, Coming Home, which contains the lyric, “I’m going back to places that I couldn’t wait to leave.” When the odd notion comes into my head that it might be fun being full time again in magazines or newspapers, that lyric can’t help but run through my mental iPod.
So those are 5 myths. I’ll revisit this list periodically and probably add to them. Reader input always welcome. Email me at jonathan@findependenceday
Here’s my latest Financial Independence blog from MoneySense.
Here’s an interesting rule of thumb that most retirees and would-be retirees would do well to adopt. Developed by US financial planner Wes Moss, it’s called the 1,000-Bucks-a-Month Rule. It means that for every thousand dollars in monthly income you want in retirement, you need to have saved $240,000.
So if you want $2,000 a month from your investment portfolio, this rule suggests you’d need to amass $480,000, which just happens to be close to the minimum amount ($500,000) that “happy retirees” in the United States tend to have saved up. Note this rule is to generate investment income that is above and beyond pension income, government pensions like Social Security (in the US) or the combination in Canada of CPP/OAS (Canada Pension Plan/Old Age Security).
This guideline suggests that if you want $4,000 a month from investment income, in addition to the usual alternative sources of income, then you need to have saved almost a million in liquid investments: $240,000 times four is $960,000. If you wanted $10,000 a month, then you’d need $2.4 million, etc. It also assumes you’re at least 60 years old, although it will be a useful benchmark even for those younger than 60 and who aspire to an early retirement.
Close connection to Bengen’s 4% safe withdrawal guideline
Moss uses this handy guideline in his practice (a George-based investment firm called Capital Investment Advisor, of which he is chief investment strategist) as well as on his popular financial radio show, Money Matters. It’s also his number one tip in his recently published book. This is one I think most MoneySense readers would be interested in: You Can Retire Sooner Than You Think: The Money Secrets of the Happiest Retirees, Wes Moss, McGraw Hill, 2014.
So how does Moss arrive at this rule? It’s based on a 5% annual withdrawal rate, which means that $240,000 in investments would spin off $12,000 a year in some combination of interest, dividends and other income (which Moss calls distributions). Divide the $12,000 by the 12 months of the year and there’s your desired thousand bucks a month of income.
But 5%? Who can get 5% these days from bank deposits or even stocks? This is where it gets interesting. Note first that 5% is close to the 4% safe withdrawal rule made famous by financial planner William Bengen. He found retirees could withdraw 4% a year from a balanced portfolio and not run out of money for at least 30 years. (he includes an inflation adjustment but we’ll ignore that here). Moss is a big fan of income investing so right off the bat you can get close to 5% in certain high-yielding dividend stocks (telecom or utility stocks for example, or REITs.) You’ll get perhaps 2 or 3% from fixed income, depending how much risk you want to take but what about the rest? How does Moss stretch Bengen’s 4% to 5% in this low-yielding world?
The rest comes from growth or capital gains, which year by year will fluctuate or even be negative, but over the long haul can be another 1 to 3% on top of the more assured yield from income investing. At worst, it may involve cutting slowly into capital but as long as your income investments are generating by themselves 3 or 4%, Moss assesses that such a nest egg would easily outlast the average 30-year retirement time frame.
There’s plenty of other stuff in the book but I’ll close with just two more points. Like myself, Moss believes retirees should have completely paid off their home mortgage. And he’s not a big fan of annuities.