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.
Demographic trends can be extremely interesting. Demographic trends can influence a lot of things, they can impact voting and public policy, they can impact consumer trends, they can impact the consumption of goods and services.
The interesting thing about demographic trends is that they’re (somewhat) predictable. The way our population looks today will directly translate to how it looks in the future. Factors like immigration and advances in health care can change these trends slightly, but in general, the way people age is fairly predictable.
What is interesting about demographics is that as people age they do things differently, their behavior changes, their lifestyle changes, they consume different things.
Over the last 60+ years there have been two huge demographic waves, the first was the “baby boomers” and the second was their “echo”. These two groups are very noticeable when looking at population by age group. Demographic charts clearly show two huge population waves with troughs in-between.
Now, I’d like to preface this post with the fact that I hate predictions and forecasts. In my opinion, a good financial plan shouldn’t rely on predictions or forecasts to be successful. A good financial plan will prepare for various future events and still have a high chance of success. It’s important to anticipate possible risks and how they may impact a financial plan.
Typically, when we talk about risk we talk about investment risk and inflation rate risk. A good plan will still be successful even with changing investment returns and changing inflation rates. But what about real estate values? What about housing?
For two groups of people, the variability in real estate values should be a big concern when doing a financial plan. One group is real estate investors, people with rental properties that make up a large % of their assets. The second group is future downsizers, people who have made downsizing to a smaller home a key part of their future financial plan.
For these two groups of people it’s important to understand that real estate growth rates can vary and this creates risk. Simply assuming inflation, or inflation + xx%, is not a great strategy.
In this post we’ll look at how demographics may impact future housing demand and why a good financial plan should be prepared for different rates of real estate appreciation.
What are OAS clawbacks? How can you avoid them? How impactful are OAS clawbacks in retirement?
The typical retiree will receive an OAS benefit of $7,362 per year (in 2020) and over the course of a 30-year retirement would receive payments of $220,860 (in today’s dollars). That is a significant amount of retirement income!
OAS clawbacks can reduce this income all the way to zero. OAS clawbacks are 15% of net income, so they can have a big influence on a retirement plan. Experiencing full OAS clawbacks would mean that a retiree needs to make up this income on their own through extra investment assets. This may require hundreds of thousands in extra investment assets.
Avoiding OAS clawbacks is an important part of retirement planning. We’d like to avoid these clawbacks if possible. Through various strategies we can reduce or eliminate these clawbacks in retirement. This can be very beneficial to a retiree.
There are a few strategies that can help retirees avoid OAS clawbacks. Which strategy makes sense will depend on the retirees sources of income and their financial assets. In this post we’ve got 7 strategies to consider if you want to avoid OAS clawbacks in retirement.
But first, what is an OAS clawback?
The average investment portfolio in Canada consists of high-fee mutual funds but over the last few years we’ve seen the introduction of multiple new ways to invest. These new ways to invest are typically low-cost, highly diversified, and easy to manage. They’re a welcome change to the typical high-fee mutual fund portfolio that many Canadians use to invest.
The average mutual fund portfolio in Canada has investment fees of around 2.5% per year. On a $100,000 portfolio that’s $2,500 per year in fees. On a $500,000 portfolio that’s $12,500 per year in fees. And on a $1,000,000 portfolio that’s $25,000 per year in fees! That’s quite the drag on investment returns.
These are astronomical figures, especially when investors aren’t receiving the level of planning and advice that should be expected with these types of fees.
These fees are also not very easy to find, they’re typically hidden on the statement, or they’re split between advisor fees and investment management fees, so it’s very difficult to see how much you’re actually being charged. When looking at the typical investment statement it’s very hard for the average mutual fund investor to see that they’re paying such high fees each year.
One of the reasons these high-fee portfolios are so prevalent is because until recently, the main alternative to a high cost mutual fund portfolio was to do it yourself (DIY). This required setting up a self-directed brokerage account and it also meant buying and selling individual securities or perhaps ETFs. This can be very daunting for a long-time mutual fund investor.
But recently things have started to change. In the last 3-5 years we’ve seen multiple new ways to invest. These new ways to invest are easy, convenient, highly diversified, and low-cost. They’re typically built on an “index investing” philosophy. They’re not trying to “beat the market” but instead match the market return and dramatically lower fees. These new ways to invest include robo-advisors and the new “all-in-one” ETF.
Investing of course isn’t all about fees. There are many things to consider when creating an investment portfolio. But in my opinion the “all-in-one” ETF provides an amazing balance of all these factors and they may be the best way to grow your money.
Let’s take a look at some of the factors you should consider when creating an investment portfolio and, in my opinion, why the “all-in-one” ETF provides the best overall balance for the typical investor.
A TFSA is often the last account that we want to draw on in retirement. There are some great tax advantages to the TFSA because it allows contributions to keep growing tax free even in late retirement. New contribution room is accumulated each year and the account also regains the contribution room the following year after withdrawals have been made.
Because the TFSA is often the last to get drawn down in retirement this means that the TFSA will most likely make up a large portion of any future estate.
How large can a TFSA get? It’s reasonable to expect that with new contributions and investment growth we’ll see many TFSAs in the $1M to $2M range in the future!
The potential size of TFSAs in the future makes it important to understand how TFSAs can be passed on after death. There are a few options to consider and one option is to have multiple beneficiaries on a TFSA.
But is having multiple beneficiaries on a TFSA the right option for your estate plan? In this post we’ll look at why you may want to name multiple beneficiaries on your TFSA and some of the other options you may want to consider.