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Did Our Investment Plan Cost Us Thousands?
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.
Strategically Using CPP To Reduce Risk In Retirement
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.
Will We Die With Millions?
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.