The Thousand-Bucks-a-Month rule for retirement

Here’s my latest Financial Independence blog from MoneySense.

mosscoverFor this blog, I’ve added the cover shot of the book from which it’s drawn. For convenience, I’ve included the original blog text here:

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.

Seek Findependence, not Retirement

wohlner66This week, I did a guest blog on Roger Wohlner’s blog, The Chicago Financial Planner, which you can find here.  As I note there, Roger [pictured on the left] is the kind of fee-only financial planner I recommend in Findependence Day. By the way, Roger is a must-follow on Twitter as @rwohlner

As you can note in the comments section which follow that post, people are becoming more aware of this paradigm shift and the distinction the book makes between traditional “Retirement” and Financial Independence (or “Findependence”).

As one commented, by viewing the goal as Findependence rather than full-stop retirement, he was able to move his “retirement” date up by 15 years.

Related to this concept is a blog I did here a few months ago about Early Findependence being a more achievable goal than Early Retirement. I note in this weekend’s Financial Post, a package of stories about extreme saving (I’d call that ‘guerrilla frugality”) by Melissa Leong, including a profile of a couple who supposedly “retired” at 35.

We’ve seen these stories before of course: Derek Foster and Dianne Nahirny both wrote books describing how they retired in their 30s. But of course, they were really describing Findependence since if nothing else they were still “working” by writing books how about how they stopped working!

 

 

 

“Giving up” on saving? Don’t embrace this kind of defeatism

From time to time I see some in the media asking the question whether people are “giving up on saving.”  This was the thesis of a Maclean’s cover story last year and a version came up this week in the Financial Post.  It’s not a stance I sympathize with, which is why  I wrote a version of today’s blog earlier this week at www.moneysense.ca.

Here, I’ve reproduced and expanded on that blog.

It’s a free world of course and everyone can choose to maximize consumption today, even if it means paying more tax because of foregoing contributions to tax-assisted retirement plans (RRSPs in Canada, or in the United States, contributions to IRAs or 401(k)s.)

But giving up on saving does have consequences. This choice means you’re also giving up on more consumption in the future, and giving up the chance for freedom (or financial independence) while you’re still young enough to enjoy it.

People are perfectly free to spend to the full extent of current income but leaving no margin for error for job loss or other emergencies is just plain foolish. Any financial planner will tell you that enough savings to last six to nine months without employment income is the minimum prudent emergency cushion—an amount that can now be well taken care of by the cumulative $25,500 in TFSA contribution room now available to any Canadian 18 years of age or older. (For the benefit of any American readers, the Tax Free Savings Account is the equivalent of Roth plans, although TFSAs were only introduced in 2009. Same idea but different rules. See also note at end of blog).

Alternative is working till you drop

Beyond the customary emergency savings, giving up on saving for longer-term goals like retirement really means resolving to stay in the workforce (employers and circumstances permitting) right until 65, or 67 in the case of younger people. Indeed, the November issue of MoneySense did show how people can retire in luxury merely by finding a low-cost place to live (most of them outside the country) and living off such government income sources as CPP, OAS and GIS (in Canada) or Social Security (in the US).

While such a strategy is theoretically possible, “luxury” is a relative term and relying only on government money in old age strikes me as dangerous from a diversification point of view. In the U.S. in particular, given the nation’s parlous finances, putting all your eggs into the basket of Social Security seems an overly optimistic gamble. Not for nothing do the financial gurus counsel a three-legged stool that also includes employer pensions and private savings and investments, not to mention part-time work, real estate income and other “multiple streams of income.”

Frenzy of Rationalization

In the end, taking a defeatist attitude to saving is just making excuses. Blaming low interest rates or volatile stock markets is what my wife and I dub “a frenzy of rationalization” or FOR. It’s true that young people today have far more financial temptations than did the baby boomers: we never had to budget for cell phone plans or Internet access, nor were we under pressure to constantly upgrade to newer and better smartphones and other technological gadgets.

But again, if your perceived “needs” exactly equal your income, then the best you can hope for is to break even financially as the years pass, and that assumes steady employment. Lose that source of income and the trouble soon begins. Saving and investing means ultimately benefiting from the magic of compound interest (or compounded reinvested dividends). Giving up on saving and falling into debt should unemployment strike means the reverse and negative outcome: being subject to the disaster of compounding debt—and unfortunately, the interest rates that seem so minuscule if you’re a creditor turn out to be very high if you’re a debtor.

Far better to be a net beneficiary of even modest interest and dividend income than a victim of it. And that’s why, even though I’m personally on the cusp of Findependence I’m still not giving up on saving.

US edition of Findependence Day nearing publication

If you’re reading this blog, you shouldn’t need an explanation of the word Findependence, since this entire web site is dedicated to the book, Findependence Day. The original novel described here can be considered North American in scope but it has a lot of Canadian content with just a sprinkling of U.S. material. This will be rectified in a few months time when I’ll be releasing a new all-U.S. second edition of the book.  Watch this space for  updates on that.

The fruits of Findependence: kayaking with family in the fjords of Norway

Jon & Helen kayaking in a Norwegian fjord

While most of this blog emphasizes wealth creation, it should never be forgotten that every once in a while, once you’ve earned, saved and grown your money, there come times when some of it can actually be spent.

Yes, a luxurious vacation! Our family is currently in the second week of just such a vacation, in a Scandinavian adventure encompassing Sweden, Norway and now Denmark. Here’s a sample photograph of myself kayaking in a Norwegian fjord with daughter Helen. The rainbow says it all (it’s barely visible here smack in the centre of the photo where the slope of the mountain hits the water!)

Before this episode near Bergen, Norway, we had just completed an 11 kilometre bicycle ride through equally wonderful scenery: numerous waterfalls tumbling from tall cliffs, many trees and lakes almost reminiscent of Ontario’s Muskokas, and even porpoises and otters in the fjords. After this kayaking trip, we donned wetgear and went deeper into the fjord in a speedboat, which you can view with a photo I posted today on Twitter. (See my Twitter feed @jonchevreau).

Memories like these transcend financial considerations, especially when they are shared with family. But of course, experiences like this do require generous dollops of cash flow. It’s good to remind oneself during long stretches of earning, saving and investing that at some point there’s light at the end of the Findependence tunnel!

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The rose colored retirement dreams of the young

My latest Financial Independence blog at moneysense.ca looks at BMO Retirement Institute’s study showing there is a big discrepancy between the retirement aspirations of young Canadians and their savings habits to date. Click here for my take on it.

There are worse things than working till you die — Andy Rooney is exhibit A

On Friday, veteran CBS broadcaster Andy Rooney passed away at the age of 92, just a month after retiring. This news came too late for a package of stories in the FP this weekend about retirement but it could easily be added as an example. As I wrote here, if you have passion about your work, age is almost irrelevant, assuming you still have your marbles physically and mentally.

When I flagged this story on social media, one family member seemed to be relieved by this theme, since her own finances are in such a state that she doesn’t expect to retire any time soon. But even if you take the case of Andy Rooney to heart, that doesn’t mean you should see this as a license to stop saving and investing for the future.

For one, there may indeed come a time when you do lose your marbles — physically or mentally or both. The years when that occurs will be costly and you won’t be generating new income.

Second, even if you’re ready, willing and able to work (As the EI forms ask), you may not always be able to find a willing employer.

So even if you don’t think you’ll ever retire, you still need to shoot for a degree of Financial Independence. The book to which this web site is devoted makes continued reference to the distinction between Retirement and Financial Independence, or what I call Findependence.

In short, plan to work as long as you’re passionate about your calling, even into your 90s. But that doesn’t mean you can take a pass on saving for the future. It’s still prudent to cut debts and maximize pensions, RRSPs/IRAs, TFSAs/Roth plans and even keep adding to your taxable accounts.

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