Money IN

Planning your income as you approach retirement is quickly becoming one of the most important and overlooked aspect of financial advice.

The entire financial system is setup for clients to make contributions to their investments (which in turn generate commissions for financial institutions) and there really isn’t a huge incentive for them to sit down with you and develop a playbook for how you might eventually start to draw down on those assets.

So let’s do that.

For most people approaching retirement, they’ve become used to relatively steady and predictable employment income for years. I’ll just say from the get-go, transitioning away from that income stream to one that relies on a mix of investment income and government benefits is a huge challenge and again, something that is often overlooked.

For most people, their income after retirement will include at least a few of the following:

• Canada Pension Plan (CPP) withdrawals

• Old Age Security (OAS) payments

• RRSP/RRIF withdrawals

• Tax-Free Savings Account (TFSA) withdrawals

• Company sponsored retirement plans (DC plan)

• Life Income Fund (LIF)

• Defined benefit pensions plans

Figuring out how much to draw and from which accounts and in which order and how that changes over time, is specific to every household but as an example, lets look at an example with a two income household with partners currently 61 years of age.  Both partners plan to retire at age 65 and have the following investments:

RRSP: $696,000

TFSA: $65,000

LIF: $95,000

Collectively, their expenses are $65,000 per year and they have a $50,000 mortgage they expect to pay down before entering retirement.

Here’s a visualization of how and when they might receive income now, through retirement and assuming they live to age 95.

Ages 61-64: The orange bars represent their employment income, which is the sole source of income for the household as they approach retirement

Age 65-69: CPP (light blue) and OAS (black) kick in, along with withdrawals from their LIF.

Age 69: RRSP withdrawals begin

Age 71+: TFSA withdrawals stop and RRIF withdrawals become mandatory

It’s worth pointing out that even small changes to your account balances, household spending, or even life expectancy can have big changes on determining the optimal solution for your retirement income needs.  

Additionally, government benefits from the Guaranteed Income Supplement (GIS), Federal GST/HST credit, or Registered Disability Savings Plan (RDSP) may be applicable to your situation and also included in your income mix

Having this income available to you as you approach retirement needs to be part of the service your financial advisors provides.  If it isn’t, or your unsure about your financial situation, speaking with an advice-only financial planner that provides this level of detail can save you thousands of dollars and confusion when it comes time to juggle your various retirement income sources.

https://www.youandyoursfinancial.com/services

Stupid Things

I started my investing career in 2006, when things were different.  Amazon still sold books and most people were limited to only a handful of songs on their mp3 players and 1st generation Ipods.

Two years later when the financial crisis hit, I thought I was firmly in control of managing my own investments but had no plan, no financial objectives to guide my buy-sell decisions and as a result was overseeing a portfolio, full of stupid things.  Since the financial twitterverse seems to only convey filtered stories and experiences, here’s an unfiltered view of what my personal portfolio included at certain points:

• Two investments based entirely on a hot tip

• A single company which made up 25% of my portfolio

• An investment in a Chinese medical stock that I knew nothing about but was told by someone it would soon be bought out at a premium (it was quickly bought at a significant discount to where I bought it)

• Options positions which could move 20-30% in a single day

• Four Companies that were bouncing off their 52-week lows (because obviously what goes down must come back up? Or reversion to the mean, who knows)

• A double leveraged inverse natural gas ETF

Oh, and I did all of the above on margin (meaning I borrowed money) because that’s what a 25 year-old studying for level 2 of the CFA exam would do.

To be clear, not all of the above investments were bad bets, some actually made money. But not having a plan in place was totally stupid and made the experience a fantastic exercise in what not to do if managing your own money.

Years later, the experience has made me a significantly better investor and still makes for valuable insights to share with friends, family and eventually clients who asked, “what do I do, (or not do) with my money”.

A small allocation (like, 1%!) of your portfolio, specifically for experimenting and yes, doing stupid things is actually an experience I highly recommend, so long as there are some learnings to extract and you're not just doing it in lieu of a trip to the Casino.  A few penny stocks, or companies that might be around the corner from where you live, or investing in a stock that owns something you can pass by like a Real Estate Investment Trust (REIT) are all good options and a unique DIY investor ed exercise that just about anyone can enjoy, not just investing nerds.

No time? Not interested?  Not disciplined enough? For the management fees some (definitely not all) Mutual funds or Robo-advisors charge to take care of your investments, it makes plenty of sense to leave the investment decisions to someone else to get your money working for you.   All are fine options and all will steer you clear from having to decipher the head-spinning financial advice on google or twitter.

Added bonus? Avoiding all the stupid things.

Never been better

You’re looking for financial advice.  There’s something about your money that you’re not quite sure about and figure it’s probably time to speak to a human about it.  Whether you get a recommendation from a family member or friend, the experience continues to be pretty consistent. The advisor will sit you down,  talk personal finances, possibly offer you a new line of credit or travel rewards card and before you know it, the glossy pamphlets are on the loose with a clear pitch; invest with us, your money will only go up in value, you’ll be on the path to riches, sign here.

It all sounds like it makes sense, but in reality it's a lot of information and understanding what your money is invested in is difficult.  Most people have no idea how to assess their investment performance, both return and risk, or how much you’re paying every year in fees or commissions.  But that travel rewards card means you get access to the swanky lounge, so that’s a thing, right?

We put way too much trust in financial institutions and it’s perfectly clear, why.  They went all in on calling their mutual fund sales pitch, “advice” and not providing much, if any, actual advice or planning.

Even with the proliferation of Robo-advisors, exchange traded funds (ETF’s) and low-cost (D-series) mutual funds, the majority of the financial world seems stuck in 1994, pushing nothing other than high-priced mutual funds when so many alternatives are available. It sorta feels like, if HMV still existed today and was trying to convince you that buying a $16 CD was the only way to listen to music.

But it’s 2018 and it’s never been better for regular people to invest their savings into a globally diversified portfolio at a significantly lower cost than high-priced mutual funds (these are usually the A series funds that have an embedded fee over 2.5%, which, yes, is a lot!).

For starters, there are D-series mutual funds, which are identical to their higher priced A-series siblings.  The D-series are half the cost to own (1.25% compared to 2.5% on average for the A-series varieties) and only available through your bank’s online brokerage.  Because you can only invest in D-series funds online, you lose access to the financial advisor, which, may not be a bad thing since you’re tired of sales pitches, right?  Hiring an independent financial planner who will really walk you through your budget and how to reach your financial goals is an effective combination that I highly recommend.

Then, there’s the new kid on the block, Robo-advisors, which in many ways are similar to a mutual fund in that, both monitor and rebalance a portfolio of investments for you and charge a fee for doing so, usually, less than 0.75%.  While some Robo-advisors offer basic financial planning, it’s far more accurate to think of Robo-advisors, as Robo-Investment Managers. They’ll manage your investments, but are generally a bit light on providing detailed financial advice. That’s probably ok if you’re single, in your 20’s and only have you to worry about but in more complex situations like family planning, caring for a parent or considering a career switch, you may be looking for more detail and dialogue about what to do. Again, hiring a fee-based financial planner who will walk you through your budget and how to reach your financial goals is an effective solution that has become increasingly popular as the number of independent financial planners increases.

Finally, while not for everyone, managing your own portfolio of low-fee ETF’s is an option.  Yes, there’s an ETF for just about everything these days from marijuana to electric vehicles, which can lead people to feel like choosing the right combination of ETF’s is an impossible task. Fortunately, Vanguard has simplified that task by creating three new, asset-allocation ETF’s which do the work for you and are based on your risk level:

• Growth (80% equities)

• Balanced (60% equities)

• Conservative (40% equities)

(In case you’re wondering, I’m not affiliated with Vanguard in any way.  Their new ETFs are the only all-in-one ETF solution, which, in my opinion is one of the best financial products to come out in years along with Robo-Advisors)

Access to cheaper investment products is only half of the ongoing disruption in the financial services industry, the other half is the growing army of independent financial planners and money coaches who don’t sell products and provide truly unbiased financial advice.  Most people go to an advisor because they’re feeling unsure about their finances and are just trying to feel better about their money. With investment fees on the decline and access to people who you can have real money talks with, its never been better to find a financial solution that works for you.