by Owen | Aug 24, 2020 | Behavioral Finance, Investment Planning
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.
by Owen | Aug 17, 2020 | Government Programs, Investment Planning, Retirement Planning
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.
by Owen | Aug 10, 2020 | Financial Planning, Insurance And Risk Management, Investment Planning, Retirement Planning
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.
by Owen | Jul 27, 2020 | Behavioral Finance, Financial Goals, Financial Planning, Investment Planning
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.
by Owen | Jul 6, 2020 | Behavioral Finance, Buying A Home, Down Payment, Financial Planning, Income, Investment Planning, Retirement Planning
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.
by Owen | Jun 15, 2020 | Financial Planning, Government Programs, Investment Planning, Retirement Planning, Tax Planning
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?
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