A Novel Approach to Financial Independence is one of the bestselling e-books in Amazon.ca’s Love & Romance category, as you can see in the screen shot to the left. Here’s the link to Amazon’s listing. Depending on the day, it sometimes hits #1 in the category.
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).
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.
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!
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.
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.
As predicted in the morning papers, the Conservative government has formally announced its long-promised introduction of family income splitting. A $4.6 billion-a-year package of tax measures was unveiled Thursday afternoon in Toronto. As of 4 pm Thursday, here is the latest report from the Globe & Mail.
As expected, there was also an enhancement to the universal child-care benefit. The previous $100/per month for each child under six is being raised to $160/month. And parents with children between 6 and 17 will receive $60/month for each child of that age, effective January 1, 2015. However, the existing Child Tax Credit is being eliminated.
Also as anticipated, couples with children under 18 will be able to split income for tax purposes by transferring up to $50,000 of income from the higher-income earner to the lower-income partner, effective for the 2014 tax year now in progress. As speculated in the morning papers, the original proposal has been slightly watered down to impose a maximum (annual) benefit of $2,000: a sop to critics who carped that otherwise high-income earners would unduly benefit from family income splitting.
Pension splitting foreshadowed this
The precursor to family income splitting was pension income splitting, which provides a considerable tax break to retirees when one couple has a large employer pension and the other spouse does not. Introduced in the 2007 budget, pension income splitting already operates in a similar fashion to how family income splitting would work. Pension splitting is implemented when couples prepare their annual tax bill each spring.
During the 2011 election, the Conservatives floated a promise aimed at families with children up to 18 years of age; it would permit the higher-earning parent to transfer up to $50,000 a year of income to the lower-earning spouse. In effect, this would reduce tax levied at the highest marginal tax rate for the higher earner, while the lower-earning spouse would be taxed at their likely lower tax rate. Seen as a family unit, the net tax paid by such couples would be potentially thousands of dollars less.
The classic example is to compare a one-income family where the sole breadwinner earns $100,000 a year and is taxed accordingly, versus a family where both spouses earn a more modest $50,000 a year and are taxed relatively less. A 2011 research paper from C.D. Howe Institute said the tax savings could run as high as $6,400 a year for some high-income families earning at least $125,000 a year. It said 40% of the benefits of family income splitting would go to those high-income families.
Many families — and singles — would gain nothing
While it’s nice that seniors and families with children can gain from income splitting, in between are many Canadians who would not benefit from the measure. CD Howe found 85% of households would gain nothing. That would include families where both spouses are in the same tax bracket and of course single parents who have no spouse with whom income could be split for tax purposes.
Looming election issue
I’m all for anything that boosts the financial independence of heavily taxed Canadians. Part of me thinks that all taxpayers should be treated equally, rather than singling out seniors and parents. On the other hand, there would be a high cost to the federal treasury if income splitting were applicable across the board. Because it potentially affects so many of us, family income splitting is bound to become a major political issue the next time we go to the polls. Liberal leader Justin Trudeau has said he would repeal family income splitting if he were to be elected next year. The NDP is sitting on the fence on the issue, saying it wishes to study the measure before deciding on its position.
When I posted a link this morning on my Linked In account, Allen Scantland — an accountant in Metcalfe, Ont. who is running for city council — said “the arguments against income splitting in my mind are baseless, derogatory and wrongly associated with old notions of who earns money in the family.” Scantland said relatively few families have a primary earner making more than $100,000. Most make less and have to make tough choices on childcare, homes and where to work. “Almost all families spend their money together and should be able to level their taxes by income splitting. It is a social good.”
Tickets still available for Saturday retirement event
On a related note, the MoneySense retirement event is on Saturday morning. Last I checked, tickets were still available. Details can be found at MoneySense’s website here.
Also, if you listen to Motley Fool’s podcasts, I was a guest of Chris Hill on Thursday’s edition of MarketFoolery. The 14-min clip can be found at iTunes here. We talk about how Canada’s stock market resembles Australia’s, the fact Canada is concentrated in just three sectors, longevity, retirement versus Financial Independence, and even a prediction I made in 1983 about cell phones.
Sun Life Financial assistant vice-president Kevin Press has penned a retirement planning article carrying a provocative headline: “Your retirement date will probably be a surprise.”
Published at www.brighterlife.ca, Press cited the most recent survey of Sun Life’s Canadian Unretirement Index and its startling finding that only 31% (fewer than a third) of Canadian retirees said they stopped work on the date they had actually planned. This attracted a fair bit of social media commentary, including my own predictable quip attributed to deceased Beatle John Lennon in his final album: “Life is what happens to you while you’re busy making other plans.”
Employers set the date a quarter of the time
At one level, the inimicable Press is of course correct. The precise date of retirement isn’t always a variable under one’s complete personal control. In these days of corporate cost-cutting, there’s little guarantee that one’s employment in a particular firm will last to the exact and convenient day of your projected retirement. One in four said they left their jobs because an employer decided that was the way it was going to be. The decision was forced by the employer for 10% of those surveyed, while another 15% took their employers up on their offers of early retirement.
Health is another major factor
But even if they love you and are willing to throw frequent raises and bonuses your way, your health may not cooperate. Sun Life found a whopping 29% reported their work lives ended prematurely because of “personal health or medical reasons.” Another 2% left not because of their own health but because of the deteriorating health of a loved one for which they had to care. Adding 14% more who experienced unexpectedly early retirement for other “unspecified” reasons, that’s 69% who did not finish their career as they had originally planned or expected.
This is all interesting data but should not be viewed as a particularly disturbing trend. Retirement planning is as much an art as an exact science and any financial planner will tell you that, even if employers and health are in your favor, there are many variables that will change the exact finish line. Stock markets will vary, as will interest rates, currencies and other factors. Even the related concept I call “Findependence Day” I have described as a moving target: if markets go on a tear the last few years before your planned departure from the workplace, your liberation from work may happen a few years earlier than it might otherwise have been. If markets languish in an extended bear market, you’ll probably decide to hang in there a few extra years, again assuming robust health and a willing employer.
In fact, a Sun Life ebook authored by Kevin Press quantified this in the wake of the 2008 financial crisis. Based on the traditional retirement age of 65, Sun Life surveyed Canadians as to what they thought they’d be doing at age 66. In 2008, 51% thought they’d be retired by that age, and in 2009, 55% thought so. This plummeted to just 28% in 2010 and has hovered between 27% and 30% in the subsequent years to 2013.
At the same time, the percentage who thought they’d still be working full time at 66 rose from just 16% in 2008 to 27% in 2013. Two thirds of those expecting to be working past 65 said they‘ll do so because they “need to” financially. By 2010, the average age at which Canadians expected to retire had jumped from 64 (in 2009) to 68 by 2010 and 69 in 2011. As confidence has returned, this average expected retirement age has since fallen back to 66.
Press’s e-book can be found here, and includes links to several calculators that should make your rough retirement date less of a surprise.
Half way through a three-week vacation in Turkey, I’ve been experimenting with the idea of integrating a little work with the travel. As my daughter has noted after a long summer of independent travel, everyone has SmartPhones these days and it’s not hard to find places with wireless: all hotels and most good restaurants have them, and many other places as well.
Roaming charges from North American telecom suppliers are prohibitive so we do what the student travelers do and leave the devices permanently in Airplane mode. That means enforced SmartPhone vacations from email and social media during times between wireless access but hey, it’s a vacation too, right? And anyway, who wants to be connected all the time?
In blogs earlier this summer (a summer that for me has extended through a lovely September in Toronto and now an even sunnier continued summer in Turkey), I described Tim Ferris’s idea of mini-retirements, described more fully in his best-selling book, The Four-Hour Workweek.
For me, the longest vacation I’ve had until now was two weeks long: my honeymoon in 1989, and two subsequent fortnights (as the British call them) in Europe and Scandinavia. So three weeks is a record but I can see how those of us from colder climates might eventually want to arrange their “Findependence” to include stints of eight or ten weeks in a row nicely timed to avoid January, February and the first half of March. (the depths of winter in Canada and the northern United States).
I’ve referred before to the American folksinger Phil Ochs and his (I believe) last album, entitled Rehearsals for Retirement. I won’t rehash my usual distinction here between traditional Retirement and Financial Independence but suffice it to say that a longer-than-the-normal two-week vacation can be considered either a Mini-Retirement or a Rehearsal for Retirement (or both?).
You can “work” during Mini-Retirements
Since my notion of Findependence sees a continued role for work and creativity well into one’s 60s and 70s, a Mini-Retirement or Retirement Rehearsal simply means travel along the lines this Turkey trip has gone but more so.
As you can see by reading these words, I felt moved to write this blog while still abroad, if only because I need to have some words to surround the photos that accompany it. I’ve been posting such photos to my Twitter and Facebook feeds all along but not without the context a longer blog can provide.
As was the case when I was blogging from home this summer, I’m composing the first draft of this on my laptop outside. As I sit on the second-floor balcony of the Su Hotel in Bodrum, Turkey, the sun is hitting my feet but the rest of me is in shade. Below and in front of me I can see a long lap pool that at night is lit up in my favorite shades of blue and green. Even at mid-day you can still hear the odd rooster crowing, though nothing like they do around dawn. Later, during a final edit and with lunch beckoning with the family, I’m sipping a glass of local red wine.
The longer the Mini-Retirement, the more work may play a role
Thus far, this vacation has resembled the one-week and two-week versions: nice accommodation, meals out, guided tours etc. Not what I’d term guerrilla frugality! In the future, if and when we attempt a ten-week stay somewhere like France or Italy to get away from winter, I can see ratcheting down expenses considerably from these levels. Probably, we would rent a house or villa for several weeks, shop for groceries and wine locally, and prepare our own food in our temporary home, just as we would do at home in Long Branch, Ontario. We would have full Internet access and all the gadgets that accompanied us on this shorter vacation: Kindles, iPhones, Blackberries, iPads and laptop computers.
Even during this Turkey trip – wireless permitting – I’ve surprised myself by staying on top of the news as much as I have and similarly monitoring and posting to various social media. The quantity is no doubt much reduced, perhaps to the relief of all concerned. But this trip has confirmed in my own mind that it is indeed possible to combine business and travel to some extent, even if the pleasure/work ratio is slanted heavily to the Pleasure side. For the curious, we do have a family member who is keeping the home fires burning: that means the cat is getting fed and orders for the Findependence Day book are being fulfilled with no delay. The cloud accounting software I described some weeks ago can be accessed remotely, as can our bank accounts and discount brokerage accounts.
While I’ve only made a stab here of testing the idea, I suspect that the longer the mini-retirement (or extended vacation) and the more you settle in one particular spot, the more “work” would play a role — defining “work” as something that creates invoices or at least moves forward long-term creative projects that might one day bring in revenue.
In short, the rhythms of life continue. In many respects, it’s the best of all worlds and I look forward to trying an extended “Mini Retirement” as early as January of 2016 (plus of course shorter vacations in the meantime).
It’s not often I read a book twice and even rarer that I’ve reviewed the second edition of a book. The rare exception is Daryl Diamond’s newly revised Your Retirement Income Blueprint, published by Wiley Canada in 2011 and now in 2014 by Milner & Associates Inc.
A major reason is revealed in the back-cover blurb I supplied for the new edition. When the original came out, I was still fully employed and the idea of retirement or financial independence were just theoretical concepts. But as I say in the blurb, now that I’m transitioning from employment to semi-retirement or self-employment, “I intend to use Daryl’s blueprint as my personal plan for drawing income from a diversified portfolio and other income sources.”
Different skill set for decumulation
Diamond rightly points out that there is a world of difference between wealth accumulation and drawing an income. He’s probably also correct that there are a lot fewer financial advisors who specialize in decumulation, compared to the legions who are focused on wealth accumulation.
Diamond – who like myself was born in 1953 – lays out a six-step plan for creating and implementing a retirement income blueprint. Even on a second read, I still found myself underlining certain passages that must not have penetrated my thick skull originally. Things like the Age Credit and Pension Tax Credit tend not to be top of mind until you actually stand to benefit from them. (And I don’t yet but can see the day fast approaching when I would!)
Where Diamond really adds value is the way he integrates tax planning with a logical order for drawing on various retirement income sources. His “Cash Wedge” or “Floor and Upside” concept seems to me a variation of Asset Dedication: setting up enough cash flow to draw down on for the first two or three years. His discussion of the order in which to draw on government and employer pensions, annuities and registered and non-registered investments is masterful. And his recommendations are not always obvious. For example, he’s generally in favor of taking OAS and CPP benefits relatively early, in part because he has an acute understanding of how higher income later in retirement can impact the aforementioned age and pension credits, or indeed receipt of OAS benefits at all.
In a similar fashion, he advocates using non-registered (or what he terms tax-paid) assets when you move into higher tax brackets.
Sweet spot for age and pension credits
While the editions aren’t hugely different – the blue front cover is virtually identical in both editions — Diamond and editor Karen Milner have done a good job updating everything to 2014. So, for example, you will learn (on page 158) that the tax-efficient net income “sweet spot” in 2014 for someone aged 65 or over is $34,873. Or, a few pages later, that the federal “tax-free zone” is $18,054, which rises to just over $20,000 if the pension credit is generated.
He also makes it clear that letting vehicles like tax-deferred RRSPs grow indefinitely can be tax-inefficient, since that creates what can be a “tax trap” after age 71, when minimum and fully taxable RRIF income starts to kick in. So he shows how you can start withdrawing income from RRSPs or RRIFs to get you to the top end of any given tax bracket, even if the extra (and taxable) income is not required that particular year. He’s also a big fan, as I am, of the Tax Free Savings Account or TFSA.
No doubt I will frequently consult this book personally as I progress to later stages of the “Findependence” journey I’ve been chronicling in these blogs.
All I can say is the $26.95 retail price of the book is trivial compared to the tens of thousands of dollars that could be saved by implementing the steps in the proper order.
As I noted Thursday in this blog and elsewhere, I’ve always believed Canadians should have higher RRSP contribution limits and/or the equivalent space in registered pension plans.
It seems the C.D. Howe Institute agrees, based on this paper released Thursday, and which has already created a fair bit of publicity. I’ve received some email on this site (via firstname.lastname@example.org) to the effect that “only the rich” benefit from more RRSP room and that, in any case, low-income earners are better off with TFSAs.
I’ll quote from some of the skeptics below, but first let me reiterate the point that Ottawa will eventually get any tax revenue it may lose by raising RRSP limits now. As any retiree with a substantial RRIF knows, forced annual RRIF withdrawals will be fully taxable and may even result in the clawback of OAS or other benefits. That’s why some question my statement that higher-income earners should welcome more RRSP room.
Two pluses, one minus
I know those with big RRSPs will eventually pay the piper but remember two things. One, several years or decades of deferred and compounded growth on investments is worth a lot. Second, most of us can expect to be in a lower tax bracket in retirement than when we were working. If you can defer tax while you’re in a 46% tax bracket and pay it many years later when you have no other income and are in a 23% tax bracket, that to me is a fair trade.
A 72-year old reader with the first name James makes the following counterpoints:
… when the other shoe drops and you are withdrawing money, here are the nasty realities:
1. You may be paying higher tax rates than when you put it in! This is true in my case and you do not have to have amassed a huge fortune for that to occur.
2. The whole nasty business of clawback, which has huge potential marginal tax rates.
3. The fact that the government controls the rate at which you reacquire your own money – regardless of your needs and limitations.
Any reform of RRSPs therefore should not only deal with maximum deposit limits but should remove any restriction on the amount and the timing of withdrawals. If I want to leave it in there until I die I should be able to and it can then by taxed in my estate (as a lump sum, which the government would love!) or passed on to one more generation – the spouse.
In the absence of hard numbers on this situation, I tried very hard to come up with my own scenarios using a sophisticated hand-held financial computer, and concluded it was better to collapse my entire RRSP before my 72nd birthday, but I may be on shaky ground without stronger financial planning tools than I had access to.
What if we didn’t tax CPP and OAS benefits?
Another reader, James from British Columbia, makes a suggestion that has occurred to me in the past. Instead of introducing an expanded CPP that will antagonize employers by in effect hiking their payroll costs, why not just make CPP and OAS income go further in old age by not taxing the income?
There could be a means test to apply some tax rate for high income earners, as there is now on OAS, but people who earn under $75,000 per year, for example, would pay no taxes on CPP and OAS benefits.
That simple, stroke-of-the-pen policy change by Ottawa would boost retirees incomes by at least 15% on those sources and not cost a single job. Nor would it require any provincial consensus.
It would cost Ottawa tax revenue, so of course it’s a nonstarter, but it’s not difficult to eliminate the job-killer argument if the federal government really has the will to help low-income retirees.