Feeling financially secure has nothing to do with how much money you have or how much money you earn. Feeling financially secure is all about how you feel about your finances, how you manage your finances, and your attitude towards money in general.
Financial insecurity is a very common feeling. It affects both low-income and high-income households, it affects both young and old. In fact, according to the most recent FP Canada survey, at least half of us are affected by financial stress in some way.
“Half (50%) of Canadians say that financial stress has impacted their life in at least one way, with health issues (18%), marriage/relationship problems (15%), distractions and reduced productivity at work (14%), and family disputes (13%) the most common ways stress affects them.” Source.
When talking about financial security, it’s important to differentiate between BEING financially secure and actually FEELING financially secure. It’s possible to BE financially secure but not FEEL that way. It’s possible to be in a great financial position but without the right knowledge, routines and plans, it may not actually feel that way.
In this post we’ve outlined eight things you can do to FEEL financially secure (even if you still have the exact same income, spending, and savings).
Can you retire when the stock market is at an all time high? For many soon-to-be retirees this is an important question. It can be extremely nerve-racking to “pull the plug” and leave a stable income when investment values are at their peak.
But is this really a concern? Is it bad to retire when markets are at an all time high?
For many soon-to-be retirees, their investment portfolio will make up an important part of their future retirement income. Even retirees with a pension or full CPP/OAS will often have a small investment portfolio to support additional spending in retirement.
Many retirees worry about retiring at an all time high. They worry about a large decline in investment values soon after retirement. They believe this will dramatically impact their retirement plan. But is this concern justified? Or is this one of those biases that we’re all susceptible to?
Working for a few additional years would certainly help solidify a soon-to-be retirees financial plan, but at what cost? That lost time can never be recovered and could represent some “prime retirement years”. That income may also never be needed if everything goes to plan.
As it turns out, we’re actually at an all time high quite often, and the impact of retiring at an all time high isn’t even close to what we’d assume…
Like any good investor we have an investment plan, and one part of that investment plan involves rebalancing. We have a very specific rebalancing schedule and rebalancing rules. These rules help us know when we should and should not rebalance. But did these rules just cost us thousands?
In early 2020 the quick drop in investment values and equally quick recovery was an investment rollercoaster and it left more than a few people feeling slightly nauseous. It was incredible how quickly investment values declined, and it was equally incredible how quickly they recovered.
In hindsight, had we rebalanced during that dip, we could have been thousands of dollars richer today, perhaps even 10’s of thousands.
Why didn’t we rebalance during the drop? It wasn’t in our plan.
The majority of people choose to start CPP as early as possible. In fact, over 9 out of 10 people choose to start CPP at or before the age of 65. This means that the majority of people aren’t using CPP strategically to reduce risk in retirement.
The way CPP works means that it can be a great tool to help absorb inflation rate risk and investment risk in retirement. But many people choose to ignore these benefits (or aren’t aware of them in the first place) and simply start CPP as soon as possible.
One common strategy we’ll review in this post (but not the only strategy) is to delay CPP to age 70. By delaying CPP by 10-years the payments are over 200% higher than at age 60. There is a 0.6% increase for each month of delay between age 60 and age 65. Plus, there is a 0.7% increase for each month of delay between age 65 and age 70.
Delaying CPP to age 70 is a great way to reduce risk in retirement but it’s not necessarily the best decision in all situations. There are a few other CPP strategies we can use to help reduce risk in retirement if faced with certain circumstances. This could include low investment returns, negative investment returns, or high inflation.
Rather than start CPP at age 60, or delay CPP to age 70, we can choose to start CPP at different times depending on the circumstances. This flexibility can help us decrease risk in retirement and provide more flexibility.
There are four CPP strategies we can use to help decrease risk in retirement. The first, delaying CPP to age 70, is relatively well known, but the other three strategies we’ll cover in this post are unique and can be used if faced with certain circumstances between age 60 and age 70. This provides a retiree with some flexibility to optimize their CPP start date depending on the circumstances at the time.
The 4% Rule is a common personal finance rule. It suggests that a retiree can spend 4% of their initial retirement portfolio each year, adjusted for inflation, and have a reasonably high chance of success.
When talking about the 4% Rule, a retirement period is considered a “success” when the retiree doesn’t run out of money by the end of retirement. Any investment balance above $0 is considered as success, even if that’s just $1.
By using this safe withdrawal rate, the success rate of a retirement plan could be as high 90%-95%+. This means that during 5%-10% of historical periods a retiree could run out of money if faced with the same sequence of returns in the future.
But… this also means that during 90%-95% of historical periods a retiree will end up with money left over, sometimes a lot of money.
This is the unspoken downside of the 4% Rule. By aiming for a high success rate of 90%-95% we’re often building plans for the very worst-case scenarios. By using the 4% Rule we’re planning for a very poor sequence of returns in early retirement, we’re planning for below average returns for 5, 10, 15+ year periods, or we’re planning for high inflation that is significantly above the average.
But what happens if we get average returns, average inflation, and steady growth year over year… well… we could die with millions in the bank.
No one wants to be “the richest person in the graveyard”, so what can be done about the fact that 90%-95% of the time the 4% Rule will leave us with lots and lots of money in late retirement?
There are a couple options to consider but first, let’s look at the typical “success rate” analysis that we do in a retirement plan and what “success” actually means.
A lot of focus gets placed on the BIG personal finance decisions, buying a home, using a TFSA versus an RRSP, which investments to use etc etc. But really, it’s the small decisions, the ones we make daily, weekly, monthly, these are the decisions that have the largest impact on our personal finances.
When we look at someone’s financial journey, it’s typically not made up of leaps and bounds but rather small steps and steady progress. There typically isn’t one defining moment that leads to someone’s wealth. It’s usually a repeated process of saving and investing.
Like a snowball, wealth usually starts small, but it builds quickly. It generates more and more momentum as it gets larger until it becomes something unstoppable.
To build a wealth snowball is simple. It requires commitment in the beginning, with new contributions made on a regular basis. It requires growth, those contributions need to be invested and any investment income needs to be reinvested. And it requires time, time for the wealth snowball to gain momentum.
Given those three factors, at some point in the future, the wealth snowball will be driven not by contributions but by growth. New contributions will be dwarfed by annual investment growth and the snowball will grow faster and faster.
The important thing when building a wealth snowball is to stay on track, ensure spending is less than income, ensure the leftover gets invested regularly, and keep focused on the long-term because it takes a bit of time before growth overtakes contributions.