HOW DOES QUITTING WORK BEFORE AGE 65 AFFECT YOUR LIFE
Lots of people dream of being able to retire before age 65. Not only can working be stressful, it may not be that much fun. It definitely can’t compare with your vacation time, which for many people, if how they imagine retirement will be.
If you are convinced that early retirement is for you then you will need to save more money while you are working to make sure you have enough money for the rest of your life. Not only will you have less time to save money, you’ll also spend a longer time depleting your savings.
In The Real Retirement by Fred Vetesse and Bill Morneau (Fred is an actuary and Bill is now the Minister of Finance for the Government of Canada), the authors spelled out the extra costs of retiring early. Their conclusion is: It’s quite expensive to leave the work force before age 65. Here’s why:
You will receive a smaller Canada Pension Plan payment because you don’t have as many qualifying years. Remember C.P.P. is guaranteed for life and indexed for inflation so this will affect your retirement income for the rest of your life.
You will need to significantly increase your savings rate while you are working and raising your family to pay for your decision to retire before age 65. Remember according to our experts, you need to save 6-10% of your family income for 40 years to have as much money in retirement as during your working years (minus fixed costs like mortgages and child rearing expenses).
So how much extra will you need to save for those 40 years? Vetesse and Morneau concluded you would need to increase your savings rate by 3% for every year you want to retire early. See the chart below for some examples.
If you want to retire at age: Your yearly savings rate will be:
65 10%
62 19% (10% + 3 years x 3%)
60 25% (10% + 5 years x 3%)
Remember, this calculation is to balance the amount of money you have to spend while retired with the amount of money you have to spend while working. So if you want out by age 60, plan to save 25% of your family income for 35 years.
People who plan to retire by age 50 or earlier really have to dramatically increase their savings during their working years. On some “Retire at 40” sites I’ve visited, people are saving 50 or 60% of their incomes in order to get out at a young age. Many of these folks don’t have children or have 1 child. I’ve already mentioned, let’s hope not everyone follows their life plans, or we won’t have much of a country in 50 or 60 years.
Monday, September 24, 2018
Monday, September 17, 2018
STICK TO THE BASICS, YOU WILL BE A SUCCESSFUL DIY INVESTOR
STICK TO THE BASICS, YOU WILL BE A SUCCESSFUL DIY INVESTOR
DIY investing is both easy to do and hard to do. It’s easy because it doesn’t take a lot of time, it’s not complicated, and you don’t have to know much about the stock market, investing or anything else financial.
However, it’s hard to do because we’re humans and we get tempted by our emotions to want more, and want it right away. How many times have I been unable to resist the bag of chips in my cupboard? If only you knew.
Your best chance of being successful at DIY investing is not to look at it as a hobby and not to spend too much time listening to the “experts”, or your brother-in-law or the taxi driver who all seem to know what’s going to happen with this and that. You have to find a way to turn to all off when it comes to investing.
I realize I’m asking you to ignore all the other advice you’re bombarded with except for the strategy on this blog, but I can explain that. I’m not trying to sell you anything and this is not my strategy. The idea of saving 6-10% of your income and investing in low cost index funds is recommended by the experts who study investing and are also not interested in selling you anything. They are the good guys in the investing world and who else are you going to trust?
I tend to read quite a few articles on investing because I find the topic interesting, the same way a hockey fan reads articles on who is getting traded to his favourite team or something like that. It’s a distraction and I do occasionally pick up some good tidbits of information. But the truth is about 99% of the thousands upon thousands of articles you’ll find on investing only complicate things and make it easier for you to make a mistake. So, forget about it. Just know that you are making an incredibly wise decision to invest this way and you will be rewarded when the time comes to retire. Saving for retirement is not a sprint, it’s a long, slow marathon.
If you feel this urgent need to boost your investment results, something else is probably going on in your life that’s causing you grief. Maybe the boss is driving you crazy and you’re looking for a way out, or you’re going through that mid life crisis and are bored with playing it safe. Whatever it is, find another way to deal with it. Leave your investing strategy alone and you will be grateful when the time comes to retire.
STICK TO THE BASICS, YOU WILL BE A SUCCESSFUL DIY INVESTOR
STICK TO THE BASICS, YOU WILL BE A SUCCESSFUL DIY INVESTOR
DIY investing is both easy to do and hard to do. It’s easy because it doesn’t take a lot of time, it’s not complicated, and you don’t have to know much about the stock market, investing or anything else financial.
However, it’s hard to do because we’re humans and we get tempted by our emotions to want more, and want it right away. How many times have I been unable to resist the bag of chips in my cupboard? If only you knew.
Your best chance of being successful at DIY investing is not to look at it as a hobby and not to spend too much time listening to the “experts”, or your brother-in-law or the taxi driver who all seem to know what’s going to happen with this and that. You have to find a way to turn to all off when it comes to investing.
I realize I’m asking you to ignore all the other advice you’re bombarded with except for the strategy on this blog, but I can explain that. I’m not trying to sell you anything and this is not my strategy. The idea of saving 6-10% of your income and investing in low cost index funds is recommended by the experts who study investing and are also not interested in selling you anything. They are the good guys in the investing world and who else are you going to trust?
I tend to read quite a few articles on investing because I find the topic interesting, the same way a hockey fan reads articles on who is getting traded to his favourite team or something like that. It’s a distraction and I do occasionally pick up some good tidbits of information. But the truth is about 99% of the thousands upon thousands of articles you’ll find on investing only complicate things and make it easier for you to make a mistake. So, forget about it. Just know that you are making an incredibly wise decision to invest this way and you will be rewarded when the time comes to retire. Saving for retirement is not a sprint, it’s a long, slow marathon.
If you feel this urgent need to boost your investment results, something else is probably going on in your life that’s causing you grief. Maybe the boss is driving you crazy and you’re looking for a way out, or you’re going through that mid life crisis and are bored with playing it safe. Whatever it is, find another way to deal with it. Leave your investing strategy alone and you will be grateful when the time comes to retire.
DIY investing is both easy to do and hard to do. It’s easy because it doesn’t take a lot of time, it’s not complicated, and you don’t have to know much about the stock market, investing or anything else financial.
However, it’s hard to do because we’re humans and we get tempted by our emotions to want more, and want it right away. How many times have I been unable to resist the bag of chips in my cupboard? If only you knew.
Your best chance of being successful at DIY investing is not to look at it as a hobby and not to spend too much time listening to the “experts”, or your brother-in-law or the taxi driver who all seem to know what’s going to happen with this and that. You have to find a way to turn to all off when it comes to investing.
I realize I’m asking you to ignore all the other advice you’re bombarded with except for the strategy on this blog, but I can explain that. I’m not trying to sell you anything and this is not my strategy. The idea of saving 6-10% of your income and investing in low cost index funds is recommended by the experts who study investing and are also not interested in selling you anything. They are the good guys in the investing world and who else are you going to trust?
I tend to read quite a few articles on investing because I find the topic interesting, the same way a hockey fan reads articles on who is getting traded to his favourite team or something like that. It’s a distraction and I do occasionally pick up some good tidbits of information. But the truth is about 99% of the thousands upon thousands of articles you’ll find on investing only complicate things and make it easier for you to make a mistake. So, forget about it. Just know that you are making an incredibly wise decision to invest this way and you will be rewarded when the time comes to retire. Saving for retirement is not a sprint, it’s a long, slow marathon.
If you feel this urgent need to boost your investment results, something else is probably going on in your life that’s causing you grief. Maybe the boss is driving you crazy and you’re looking for a way out, or you’re going through that mid life crisis and are bored with playing it safe. Whatever it is, find another way to deal with it. Leave your investing strategy alone and you will be grateful when the time comes to retire.
Monday, September 10, 2018
HIGH PAYING JOB YOU DON’T LIKE VS. LOWER PAYING JOB YOU LIKE
HIGH PAYING JOB YOU DON’T LIKE VS. LOWER PAYING JOB YOU LIKE
I graduated from university 24 years ago and have held several jobs in this time. I’ve concluded that it is better to have a job you enjoy that pays less than a job you detest but pays substantially more.
When you are young, it is easier to put up with a job you don’t like. It hasn’t worn you out yet, but that time will come. When that finally happens you may be married, have a couple of kids and a mountain of mortgage debt and day to day financial obligations. At that point, you are trapped. Very few parents are going to deprive their children of playing competitve sports or sell the family house to move to a cheaper neighbourhood.
I read an article last summer where a senior partner at a Wall Street law firm admitted that his firm encouraged young lawyers to go into debt to purchase fancy houses and cars and send their children to private school. The firm even used their financial connections to get lower interest rates for these expensive purchases.
The reason, he admitted, was to get these young lawyers hooked on spending money so they’d be less likely to leave their high stress, high commitment jobs. Apparently it’s not that easy to replace high quality lawyers once they’ve become big contributors to the firm’s bottom line.
The way to avoid the loss was to make it real difficult to leave. Of course, the lawyer could always decide to give it all up, but at a cost. It could cost him his marriage, his friends and his children’s future; how would Johnny and Sally ever be able to make it in this world with a public school education?
When you’re young, you really don’t know what you want, and you don’t know what will give your life satisfaction. That’s the whole point of being young; you’re exploring, learning who you are and what turns you on.
The problem is you can get caught going down a path that gets real hard to veer off later. At some point, you’ll probably realize that you’re not happy with your career choice, but you don’t have to time or energy to discover what would give you more satisfaction in life.
So most people just soldier on down that path, telling themselves that things aren’t so bad. They have wealth, prestige, and retirement is only 22 years away.
HIGH PAYING JOB YOU DON’T LIKE VS. LOWER PAYING JOB YOU LIKE
HIGH PAYING JOB YOU DON’T LIKE VS. LOWER PAYING JOB YOU LIKE
I graduated from university 24 years ago and have held several jobs in this time. I’ve concluded that it is better to have a job you enjoy that pays less than a job you detest but pays substantially more.
When you are young, it is easier to put up with a job you don’t like. It hasn’t worn you out yet, but that time will come. When that finally happens you may be married, have a couple of kids and a mountain of mortgage debt and day to day financial obligations. At that point, you are trapped. Very few parents are going to deprive their children of playing competitve sports or sell the family house to move to a cheaper neighbourhood.
I read an article last summer where a senior partner at a Wall Street law firm admitted that his firm encouraged young lawyers to go into debt to purchase fancy houses and cars and send their children to private school. The firm even used their financial connections to get lower interest rates for these expensive purchases.
The reason, he admitted, was to get these young lawyers hooked on spending money so they’d be less likely to leave their high stress, high commitment jobs. Apparently it’s not that easy to replace high quality lawyers once they’ve become big contributors to the firm’s bottom line.
The way to avoid the loss was to make it real difficult to leave. Of course, the lawyer could always decide to give it all up, but at a cost. It could cost him his marriage, his friends and his children’s future; how would Johnny and Sally ever be able to make it in this world with a public school education?
When you’re young, you really don’t know what you want, and you don’t know what will give your life satisfaction. That’s the whole point of being young; you’re exploring, learning who you are and what turns you on.
The problem is you can get caught going down a path that gets real hard to veer off later. At some point, you’ll probably realize that you’re not happy with your career choice, but you don’t have to time or energy to discover what would give you more satisfaction in life.
So most people just soldier on down that path, telling themselves that things aren’t so bad. They have wealth, prestige, and retirement is only 22 years away.
I graduated from university 24 years ago and have held several jobs in this time. I’ve concluded that it is better to have a job you enjoy that pays less than a job you detest but pays substantially more.
When you are young, it is easier to put up with a job you don’t like. It hasn’t worn you out yet, but that time will come. When that finally happens you may be married, have a couple of kids and a mountain of mortgage debt and day to day financial obligations. At that point, you are trapped. Very few parents are going to deprive their children of playing competitve sports or sell the family house to move to a cheaper neighbourhood.
I read an article last summer where a senior partner at a Wall Street law firm admitted that his firm encouraged young lawyers to go into debt to purchase fancy houses and cars and send their children to private school. The firm even used their financial connections to get lower interest rates for these expensive purchases.
The reason, he admitted, was to get these young lawyers hooked on spending money so they’d be less likely to leave their high stress, high commitment jobs. Apparently it’s not that easy to replace high quality lawyers once they’ve become big contributors to the firm’s bottom line.
The way to avoid the loss was to make it real difficult to leave. Of course, the lawyer could always decide to give it all up, but at a cost. It could cost him his marriage, his friends and his children’s future; how would Johnny and Sally ever be able to make it in this world with a public school education?
When you’re young, you really don’t know what you want, and you don’t know what will give your life satisfaction. That’s the whole point of being young; you’re exploring, learning who you are and what turns you on.
The problem is you can get caught going down a path that gets real hard to veer off later. At some point, you’ll probably realize that you’re not happy with your career choice, but you don’t have to time or energy to discover what would give you more satisfaction in life.
So most people just soldier on down that path, telling themselves that things aren’t so bad. They have wealth, prestige, and retirement is only 22 years away.
Monday, September 3, 2018
INVESTING IN DIVIDEND STOCKS VS. VANGUARD INDEX FUNDS
INVESTING IN DIVIDEND STOCKS VS. VANGUARD INDEX FUNDS
Many Canadian investors believe that you can obtain market beating returns by investing in companies that have a long history of paying dividends. It’s even better when these companies are increasing their dividends year and after year.
In Canada, suitable stable dividend companies are found in a few sectors like financial services (banks and insurance), utilities (electric and pipeline), food and drug retailers, telecom, and transportation.
Over the past 30 years these companies have in fact been better investments than the broader Toronto market which includes more volatile sectors like oil and gas and mining. Investors who bought these large companies such as Royal Bank, TD Bank, Power Corp, Fortis, Enbridge, Loblaw, Sobeys, BCE, Rogers, CN Rail, CP Rail and held them have seen growing share prices and dividends.
When I started investing 25 years ago, there were no broad market index funds. You either had to buy an actively managed mutual fund and pay the very high fees or do it yourself. Good quality dividend stocks were an excellent alterative to high priced funds.
Does that mean that you should stick to picking individual dividend stocks today or should your consider investing in index funds that buy the whole Canadian market, Vanguard’s VCN?
My personal take on this is despite the success over the past 30 years, whole market index funds are the way to go looking forward. I can think of a couple of reasons for this:
1. We are in a 35 year bull market for bonds, meaning interest rates have been falling consistently for the past 35 years. In 1981, the rate you received for buying Canada Savings Bonds was around 19%. Today, the rate is less than 1%. In an environment where interest rates are falling, dividend stocks outperform. The value of the growing dividends is greater since people are looking for alternatives to falling interest rates. We’ve reached a point where interest rates can either stay low or go up. There really is no more room to go down. If they start to go up, then dividends become less valuable to investors as bonds compete for investor attention. There is a reasonably good chance this will happen at some point in the next few years. If you believe that everything eventually reverts to the mean, then interest rates should be higher in the future and dividend stocks could underperform the overall market. Beware that things could always be different this time.
2. There are only a few sectors in Canada that offer steady dividend growth over years or decades. In the past year or so, many investors have lost huge sums of money when oil and gas companies, who had paid dividends for a few years in a row, had to reduce or eliminate their dividends. Companies that operate in very cyclical industries like oil, gas, mining, and manufacturing are not good candidates for long term dividend investing. As a result, Canadian investors are forced to keep their money concentrated in 5 or 6 sectors. In some cases, there may only be 1 or 2 players in the sector. The Canadian market is just not that broad compared to American or European markets and there are sectors that don’t really exist much in Canada (technology, pharmaceuticals, consumer staples). This increases long term risk as there could be a catastrophic event or major technology change that decimates a whole sector and, in the process, seriously damages your retirement plans. No one predicted that many large American banks would be on the verge of bankruptcy in 2009. Many of these companies eliminated dividends and their share prices have not recovered 7 years later.
Consider how much easier and less risky it is to just buy the whole market including the good dividend payers and forget about it. Historically buying low cost index funds have performed very well, especially for your international stock exposure which, according to many experts, should be about 1/3 of your portfolio.
For the Canadian component of your retirement savings, you may do better with dividend stocks, assuming the past is like the future, but why take the risk? Buying the whole market makes it less likely that you will make a big mistake.
Many Canadian investors believe that you can obtain market beating returns by investing in companies that have a long history of paying dividends. It’s even better when these companies are increasing their dividends year and after year.
In Canada, suitable stable dividend companies are found in a few sectors like financial services (banks and insurance), utilities (electric and pipeline), food and drug retailers, telecom, and transportation.
Over the past 30 years these companies have in fact been better investments than the broader Toronto market which includes more volatile sectors like oil and gas and mining. Investors who bought these large companies such as Royal Bank, TD Bank, Power Corp, Fortis, Enbridge, Loblaw, Sobeys, BCE, Rogers, CN Rail, CP Rail and held them have seen growing share prices and dividends.
When I started investing 25 years ago, there were no broad market index funds. You either had to buy an actively managed mutual fund and pay the very high fees or do it yourself. Good quality dividend stocks were an excellent alterative to high priced funds.
Does that mean that you should stick to picking individual dividend stocks today or should your consider investing in index funds that buy the whole Canadian market, Vanguard’s VCN?
My personal take on this is despite the success over the past 30 years, whole market index funds are the way to go looking forward. I can think of a couple of reasons for this:
1. We are in a 35 year bull market for bonds, meaning interest rates have been falling consistently for the past 35 years. In 1981, the rate you received for buying Canada Savings Bonds was around 19%. Today, the rate is less than 1%. In an environment where interest rates are falling, dividend stocks outperform. The value of the growing dividends is greater since people are looking for alternatives to falling interest rates. We’ve reached a point where interest rates can either stay low or go up. There really is no more room to go down. If they start to go up, then dividends become less valuable to investors as bonds compete for investor attention. There is a reasonably good chance this will happen at some point in the next few years. If you believe that everything eventually reverts to the mean, then interest rates should be higher in the future and dividend stocks could underperform the overall market. Beware that things could always be different this time.
2. There are only a few sectors in Canada that offer steady dividend growth over years or decades. In the past year or so, many investors have lost huge sums of money when oil and gas companies, who had paid dividends for a few years in a row, had to reduce or eliminate their dividends. Companies that operate in very cyclical industries like oil, gas, mining, and manufacturing are not good candidates for long term dividend investing. As a result, Canadian investors are forced to keep their money concentrated in 5 or 6 sectors. In some cases, there may only be 1 or 2 players in the sector. The Canadian market is just not that broad compared to American or European markets and there are sectors that don’t really exist much in Canada (technology, pharmaceuticals, consumer staples). This increases long term risk as there could be a catastrophic event or major technology change that decimates a whole sector and, in the process, seriously damages your retirement plans. No one predicted that many large American banks would be on the verge of bankruptcy in 2009. Many of these companies eliminated dividends and their share prices have not recovered 7 years later.
Consider how much easier and less risky it is to just buy the whole market including the good dividend payers and forget about it. Historically buying low cost index funds have performed very well, especially for your international stock exposure which, according to many experts, should be about 1/3 of your portfolio.
For the Canadian component of your retirement savings, you may do better with dividend stocks, assuming the past is like the future, but why take the risk? Buying the whole market makes it less likely that you will make a big mistake.
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