Vanguard, iShares or BMO? A side-by-side comparison of the new all-in-one diversified ETF portfolios

Investing articles can be long and boring.  How about I read the article and provide you with the important information for DIY investing success.

Here it is:

From Dan Bortolotti, a portfolio manager and the creator of Canadian Couch Potato, a fantastic blog about index investing.  I’m mentioned several times on this blog the Vanguard offerings (VGRO, VBAL, etc) but Dan goes into more detail about alternatives from Ishares and BMO.  In my opinion, all 3 company products are excellent so don’t worry too much which one you pick.

“In the past year or so, all three of Canada’s largest exchange-traded-fund providers have launched products that allow investors to own a complete portfolio with just one trade. Each includes a mix of global stocks and bonds, so anyone with a brokerage account can get extremely broad diversification with minimal maintenance and rock-bottom costs.

The ETFs will be rebalanced so they maintain those long-term targets. This feature makes them virtually maintenance-free.

And the price tag for this elegant portfolio? The management fees range from 0.18 per cent to 0.22 per cent, which is about 90-per-cent cheaper than traditional balanced mutual funds.”

Here is the article (need subscription to Globe and Mail to read):

https://www.theglobeandmail.com/investing/markets/etfs/article-these-balanced-fund-etfs-will-help-you-build-a-well-diversified/

Vanguard, iShares or BMO? A side-by-side comparison of the new all-in-one diversified ETF portfolios

Investing articles can be long and boring.  How about I read the article and provide you with the important information for DIY investing success.

Here it is:

From Dan Bortolotti, a portfolio manager and the creator of Canadian Couch Potato, a fantastic blog about index investing.  I'm mentioned several times on this blog the Vanguard offerings (VGRO, VBAL, etc) but Dan goes into more detail about alternatives from Ishares and BMO.  In my opinion, all 3 company products are excellent so don't worry too much which one you pick.

"In the past year or so, all three of Canada’s largest exchange-traded-fund providers have launched products that allow investors to own a complete portfolio with just one trade. Each includes a mix of global stocks and bonds, so anyone with a brokerage account can get extremely broad diversification with minimal maintenance and rock-bottom costs.

The ETFs will be rebalanced so they maintain those long-term targets. This feature makes them virtually maintenance-free.

And the price tag for this elegant portfolio? The management fees range from 0.18 per cent to 0.22 per cent, which is about 90-per-cent cheaper than traditional balanced mutual funds."

Here is the article (need subscription to Globe and Mail to read):

https://www.theglobeandmail.com/investing/markets/etfs/article-these-balanced-fund-etfs-will-help-you-build-a-well-diversified/

A CONVERSATION WITH A MILLENNIAL

A CONVERSATION WITH A MILLENNIAL


Yesterday, my neighbour’s son was over for a visit. He’s a twenty something living in Newmarket, ON and working in construction. He is doing quite well for himself and was recently chosen to be trained as a foreman. We started talking about how frustrated he was with the price of real estate in the Toronto area and how we was considering moving to Manitoba where the single family home that everyone wants was still affordable for a typical Canadian worker.

We also talked about how expensive things are in general from university tuition to food to cars and the difficulty young people have in finding traditional full time jobs.

His main argument was that Millennials were facing an unprecedented financial crunch on multiple fronts and this had never happened before in Canada. While I understand his frustration, I don’t think his view is entirely accurate.

I’m 48 years old and I’ve been paying attention to these sorts of issues for about 30 years. I’ve now been a part of 2 real estate booms and 1 crash. I paid university tuition in the late 80’s/early 90’s and have been buying household necessities and cars since then. I also was trying to find my first full time job in the early 90’s during an economic recession.

Looking back over these 30 years, I’ve gained some insight that puts the current conditions that millennials face into perspective. Let’s look at the typical big life decisions and expenses today compared to when I was in my early 20’s and facing the same situation as my young neighbour.

 Real Estate

This is a picture of the house my parents moved into in 1990 in Markham Ontario. The house was built in 1988, right at the tail end of the last great real estate boom in Southern Ontario. The builder (Great Gulf Homes) sold the house for $650,000 to its first owner (not my parents).
When you remove inflation, do you know how much this house has appreciated in value over the past 28 years? 14% or 0.5% per year (as a comparison, the S&P 500 total return, adjusted for inflation, was 628% or 7.32% per year in the same time period).

This house is almost as expensive today (it’s worth about $1.5 million) as it was in 1998. When you consider that mortgage rates today are about half what they were in 1998, your monthly (inflation adjusted) mortgage payment today would be less than it was in 1998.

So yes, housing is expensive but the baby boomers in the late 80`s faced the exact same issue as today. By the way, this house could have been purchased for under $400,000 in the late 90`s after the bubble burst, 39% less than its original selling price!

Cars

This is a picture of a Dodge Shadow, my brother’s first car. It came with automatic transmission and air conditioning and that’s about it. He paid $9,995 plus tax for this car in the early 90’s. At the time there was nothing cheaper on the market. If we factor in inflation, this same car would sell for $21,000 plus tax today.

So how does this compare with today? A similar sized car would be the Hyundai Accent, but that is where the similarities would end. The Accent today sells for about $15,000 but is much more comfortable, reliable, safe and feature rich. All this and $6,000 or 29% cheaper.

University Tuition
In my final year of university my tuition cost $1650. Factoring for inflation, similar tuition today would be $3500 today. Tuition is a lot more than $3500 (closer to $8000/year) so Millennials definitely have it tougher here. However, this doesn’t take into account the 30% discount available for lower income families in Ontario or the new program that begins in Ontario in 2017. Under this program, families with a income of less than $50,000 will pay no tuition.

Employment
This one is a bit tougher to compare. 24 years ago you probably didn’t need to be so well educated to find a good job. Manufacturing was a bigger part of the employment picture vs. today. However, I recently watched a Studio 2 episode on TVO where Steve Paikin traveled to Guelph Ontario to meet with community and business leaders. One main takeaway from the program was manufacturing jobs starting at $16/hour and free training were waiting for young people who were willing to work and learn.

Thinking back to the early 90’s, I have several friends who started off in temporary jobs that eventually turned into full time work. Canada was in the middle of a pretty brutal recession with unemployment rates reaching over 12%, which is a full 5% higher than today.

Many of us had the same worries as Millennials have today. Our parents were able to find good jobs without having to spend years in university or college. We weren’t sure if our degrees in psychology or political science would help us or leave us with debt and low paying jobs. There were concerns about Canada breaking up and the destruction of the world’s oceans and rain forests.

Despite these similarities, I will be willing to accept that things may be tougher for the “poorly educated” today, but that is about as far as I’d be willing to concede. Finding full time work has always been a challenge for young workers but I’m not sure it’s tougher now for well educated Millennials.

Cost of Food
This one is a no brainer. The cost of food as a percentage of disposable income has been declining since the 1960s. According to NPR, the total cost of food in 1992 was 12.5% of income. Today, it is below 10%. In 1960, people spent 18% of their income on food.

Others
Computer technology is cheaper today. Same for car rentals, air travel, clothes, music and many other consumer goods. Other items like entertainment, health care (orthodontic care, eye glasses), home renovations may have increased in price in the past half century but many of these items are near luxury wants not needs.

It is because we have more disposable income and greater expectations that we are able to buy more of these high priced services that would have been unaffordable to many a generation ago. It is only our expectations of what we should be able to buy that have changed since I was a 20 year old.

Conclusion
Perhaps it is every young generation’s right to feel worried that they will not be able to have the same quality of life as their parents. If history is any guide, Millennials should eventually overcome this worry and fit in well to our consumer driven society. Perhaps things will be different this time, but those are pretty dangerous words to believe.

One last point: I heard Warren Buffett say he’d rather be a young man walking the streets of Paris with a few Euros in his pocket than an 80 year old with a few billion dollars in the bank.

A Fantastic Calculator to Help You Decide How Much to Spend In Retirement

If you are close to retirement, I recommend you try out this retirement spending calculator created by Morneau Shepell, a large Canadian human resource company.  It's the most involved and accurate calculator I've discovered for Canadians. 

The man behind the calculator is the recently retired chief actuary at Morneau Shepell, Fred Vettese, (author of The Real Retirement, a fantastic book I highly recommend to everyone who wants to retire one day). 

Like any calculator, the results are only as good as the data you type into it.  You will need to know how much you have in your  TFSAs, RRSPs, work pensions, and other savings to get useful recommendations.  Once you've finished inputting your numbers, the calculator figures out how much you are able to spend each year of retirement under a couple of scenarios.  It's also easy for you to change some of your answers (Eg. retirement age) to see how that changes your allowable spending.

I've run through the calculations several times under different scenarios and I think the results are spot on.

Many retirees are afraid of running out of money before they die.  For that reason, I hope Morneau Shepell keeps the calculator live on their website for a long time.  The results provide data to help people make better spending decisions after retirement.

Good luck.

https://enhancement4.morneaushepell.com/ 

Investing Well. If it's so simple, how come almost no one does it?

Easy recipe for investing success:

• Save 10% of your income.  
• Every once in a while buy the Vanguard product with the symbol VGRO.  
• Do this over and over again, every year for 40 years and there's a really good chance you won't have to worry about money when you stop working.

It seems so simple.  This is the sort of advice I've been dishing out to friends, family, students and casual acquaintances for years.  The problem is almost no one follows it.

I never really found out why it was almost universally ignored. I just assumed either it wasn't important enough for people to actually do it or they were so worried about messing things up, they were willing to pay a bank or financial advisor to do it for them.

Maybe they couldn't believe that investing for themselves would be a better bet than paying a financial advisor or perhaps they just needed reassurance from time to time from that advisor. 

Faced with a choice of learning something that is probably as interesting as watching paint dry or going to your bank and having it done for you by a smiling confident salesperson, most people are going to chose the smile. 

That's too bad (but maybe it's a first world problem anyway).  Does it really matter if you have $500,000 instead of $600,000 to retire on?  Maybe not, but it still does seem like a bit of a shame you couldn't have spent the extra $100,000 yourself instead of slowing dolling it over the bank decade after decade.

Fees you pay to the bank or advisor do matter.  The average mutual fund in Canada charges a yearly fee slightly over 2% per year.   This is not a one time fee.  You pay 2% ever year and if your mutual fund increases in value, you pay the 2% on the profit as well.   This never ends until you sell.

Contrast this with the fee for buying Vanguard VGRO (mentioned above) which has a yearly fee of 0.22% or about 10 times less than your bank's mutual fund.

When you're 24 years old and barely saving, the difference between 2% or 0.22% don't really add up to much. However, as you age and continue to invest, the difference between 2% and  0.22% becomes huge.  Hundreds of thousands of dollars huge for lots of people with middle class salaries.

And for what?  The annual sit down to tell you to keep on keeping on?  The Christmas cocktail party or gift basket.

Doing it yourself is not difficult.  Anyone who can hold down a job that will allow them to save some money for retirement can do this stuff.

Find someone who can sit down with you and show you how this works.  Or take a one day course at your local library or community centre.  Join a DIY investing club.  Read more blogs like mine to build your knowledge.   There are lots of ways to learn to DIY and you will never regret knowing more.

Last resort, I consult on DIY Investing with my fellow Canadians (under age 40 please).  $99 for up to 3 hours of one on one lessons that should be more than enough time to get you up and running.  If you're interested, contact me at investingbs1@gmail.com.

Larry

  

It's True. You Don't Always Make Money on Real Estate

Investing articles can be long and boring.  How about I read the article and provide you with the important information for DIY investing success.

Here it is:

For the past 20 years many Canadians, especially those who live in Toronto and Vancouver has come to be convinced that you can't lose money in real estate because houses always go up in value.
Well here's a story featuring everyone's favourite singer Michael Buble that shows this isn't the case.

Michael bought a home in West Vancouver for $4.55 million in 2007.  He spend an unknown amount of money putting in a pool and landscaping.  22 years later, the house was sold for $5.18 million. 

If instead of buying this home, Michael has invested his $4.55 million in a low cost S&P 500 fund, he would now have $11.14 million in his account.

You have to live somewhere but if Michael had instead bought a really nice home for $2 million and invested the remaining $2.55 million, he'd now have a home worth $2.5 million or more (the less expensive homes have done much better than expensive homes) and a stock portfolio worth $6.2 million.

The key takeaway for me is we all need a diversified group of investments with real estate being just one part of the mix.   Secondly, prices for any asset class (stocks, bonds, real estate, farm land, art, etc.) can change very quickly so don't be surprised when a sure thing becomes a money loser.


Here is the article (need subscription to Globe and Mail to read):


https://www.theglobeandmail.com/real-estate/the-market/article-michael-buble-sells-west-vancouver-mansion-for-18-million-below/

Let's Uncomplicate Things

Many professions have a bad habit of making what they do far more complicated than it has to be. When I write “bad” habit, I mean bad for you. Lawyers, doctors, accountants, real estate agents, teachers, financial planners all benefit because you are not an expert and will need them to help navigate their domain.

Unless you are willing to take the time to learn about the task at hand, you are forced to pay for guidance. Almost always, this is expensive for you and sometimes, you can be given advice that is not in your best interest. The solution, of course, is education. The focus here is saving for retirement. It is actually not that complicated, but you have to be willing to listen to a few people who will not profit from giving you good advice. Let’s get started!

Let’s start by considering rule #1.

RULE #1: Pay off all your debts (except mortgage debt).

In our quest to simplify, we are going to avoid the often debated, never resolved question about whether you should pay off your debts before your start saving for retirement. Instead of one or the other, let’s take a middle of the road approach:

Pay off all debts (student loans, credit card, line of credit) but not mortgage debt before you start. This ensures that you have paid off the high interest debt AND you are still young enough to build up a nest egg before retirement sneaks up on you.

Of course there is an exception. If your employer provides you will matching retirement contributions, usually in a R.R.S.P., take it even if you have lots of debt. This is free money that should never be refused. The return of this money will always be greater than the interest you are paying on your debt.

At some point in your life, you are going to have to put yourself in a position where you are no longer in debt. The longer your prolong this date, the less time and money you will have to save for retirement. Collectively, we spend too much money and therefore save too little. But how much spending is too much?

If you don’t know how much you need to save, it’s sort of impossible to figure out whether you are on target or not. Before we look at that, make sure you have set up an emergency fund.

LET’S UN-COMPLICATE THINGS.

LET’S UN-COMPLICATE THINGS.



Many professions have a bad habit of making what they do far more complicated than it has to be. When I write “bad” habit, I mean bad for you. Lawyers, doctors, accountants, real estate agents, teachers, financial planners all benefit because you are not an expert and will need them to help navigate their domain.

Unless you are willing to take the time to learn about the task at hand, you are forced to pay for guidance. Almost always, this is expensive for you and sometimes, you can be given advice that is not in your best interest. The solution, of course, is education. The focus here is saving for retirement. It is actually not that complicated, but you have to be willing to listen to a few people who will not profit from giving you good advice. Let’s get started!

Let's start by considering rule #1.

RULE #1: Pay off all your debts (except mortgage debt).

In our quest to simplify, we are going to avoid the often debated, never resolved question about whether you should pay off your debts before your start saving for retirement. Instead of one or the other, let’s take a middle of the road approach:

Pay off all debts (student loans, credit card, line of credit) but not mortgage debt before you start. This ensures that you have paid off the high interest debt AND you are still young enough to build up a nest egg before retirement sneaks up on you.

Of course there is an exception. If your employer provides you will matching retirement contributions, usually in a R.R.S.P., take it even if you have lots of debt. This is free money that should never be refused. The return of this money will always be greater than the interest you are paying on your debt.

At some point in your life, you are going to have to put yourself in a position where you are no longer in debt. The longer your prolong this date, the less time and money you will have to save for retirement. Collectively, we spend too much money and therefore save too little. But how much spending is too much?

If you don’t know how much you need to save, it’s sort of impossible to figure out whether you are on target or not. Before we look at that, make sure you have set up an emergency fund.

Is Trying to Time the Market Worth It?

Investing articles can be long and boring.  How about I read the article and provide you with the important information for DIY investing success.

Here it is.

Trying to time the market means trying to pick a time to buy your stocks, bond or etfs.  Typically investors want to buy stocks or etfs when the market has gone down thinking they are getting a bargain.  So instead of buying when they have cash available, they sit and hold their cash waiting for that opportunity to buy low.

Does this strategy work?  No, unless you are a super investor like Warren Buffett and trust me, you and me are not Warren Buffett.

Furthermore, this article in the Globe and Mail shows that even if you are good at timing the market, the benefits of doing so are modest and therefore not worth the risk.  And the risk is huge, namely missing out on stock market rallies because you're waiting for a better deal.

Here are some key points:  Note: Lucky means fantastic timing where you buy when the market is down and then starts to rise quickly afterwards (good luck getting that right every time).  Unlucky means buying at the yearly market high and then watching your investments go down shortly afterwards.

1.  "The difference between the lucky and unlucky cases is relatively small, with the unlucky portfolio worth 78 per cent of the lucky one at the end of 2018. The steady investor who bought at the start of each year wound up with a portfolio worth 89 per cent of the lucky one.

2.  Instead of trying to figure out the best day to buy each year – a virtually impossible task – investors might be better off looking for ways to reduce fees, taxes and other trading frictions.

3. Instead of worrying about market timing, most investors would be wise to contribute to their portfolios regularly"

If you'd like to read it, click below. 

https://www.theglobeandmail.com/investing/markets/inside-the-market/article-dont-try-to-time-the-market-focus-on-fundamentals/

The Wealth Trap

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 is 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 they ever be able to make it in this world with a public school education?

I have a friend was faced with a similar decision.  He had settled into a high paying job at a prestigious law firm in Toronto.  He was making a lot of money, working incredibly long hours and not enjoying himself at all. He was in his early 30's, wasn't married yet and lived in a modest home.  He had a choice to make.  Lucky for him, the wife and kids were not an issue yet.  I don't think it was too hard for him to decide to get out while he could.  He dumped the high salary law firm and joined a non profit.  He took a huge drop in pay immediately and that cut would multiply many times over as the years passed.  When I asked him if he thinks he made the right decision, he didn't hesitate to say yes.  I agree with him.

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 of 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.  Then there are all the costs I talked about above to dropping the high paying job.  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.    

When you get older it's nice to keep their options open.  You don't know how you'll change when you get married and have kids.  As you age, you may discover your like doing something that doesn't pay very well.  You need time to think and to discover what you like and what you're good at.  You can't do that if you're stressed from working so hard and you're worried about paying for the big house.  You just don't know.

You give up too much of yourself when you go for the money and the prestige.  I know there are a few people out there who truly love the long hours and stress, but I bet there are a lot more who dream of winning the lottery and getting out. 

The Wealth Trap

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 is 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 they ever be able to make it in this world with a public school education?

I have a friend was faced with a similar decision.  He had settled into a high paying job at a prestigious law firm in Toronto.  He was making a lot of money, working incredibly long hours and not enjoying himself at all. He was in his early 30’s, wasn’t married yet and lived in a modest home.  He had a choice to make.  Lucky for him, the wife and kids were not an issue yet.  I don’t think it was too hard for him to decide to get out while he could.  He dumped the high salary law firm and joined a non profit.  He took a huge drop in pay immediately and that cut would multiply many times over as the years passed.  When I asked him if he thinks he made the right decision, he didn’t hesitate to say yes.  I agree with him.

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 of 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.  Then there are all the costs I talked about above to dropping the high paying job.  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.

When you get older it’s nice to keep their options open.  You don’t know how you’ll change when you get married and have kids.  As you age, you may discover your like doing something that doesn’t pay very well.  You need time to think and to discover what you like and what you’re good at.  You can’t do that if you’re stressed from working so hard and you’re worried about paying for the big house.  You just don’t know.

You give up too much of yourself when you go for the money and the prestige.  I know there are a few people out there who truly love the long hours and stress, but I bet there are a lot more who dream of winning the lottery and getting out.

Rent vs. Buy a Home. What's the best choice?

Investing articles can be long and boring.  How about I read the article and provide the important information for diy investing success. 

Here it is.

From the National Bank of Canada:

"In the long run, homeowners often fare financially better than renters because homeownership enables forced savings that accumulate over the years, growing into a sizeable nest egg."

"homeowners were “distinctly better off financially compared to tenants” with similar age and income profiles."

"when the principal repayment is netted out, the cost of ownership is less than renting in most combinations of housing types and locations."

 "owning enables households to select more desirable neighbourhoods, for example superior-quality school districts, where rental units may be few or non-existent."

Think you can rent and save the leftover?  Maybe you can today and next month, but your life changes and you may slip up 5 years from now.  It's probably too difficult to have extra cash in your wallet at the end of every month and force yourself to invest that money instead of spending it.

I will be encouraging my children to buy their own homes as soon as they are settled and have decided they will probably not be moving great distances to pursue job opportunities.


Read it here, if you'd like (but I've explained or highlighted all the important stuff).

https://business.financialpost.com/personal-finance/the-haider-moranis-bulletin-no-right-answer-to-rent-or-buy-debate-but-theres-no-question-who-ends-up-ahead

How Paying 1% In Fees Can Cost You A Fortune - Advice From Warren Buffett

Mr. Buffett’s annual letter to shareholders is out.  I’ve read the letter for you and am highlighting the most important point.

Here it is:

1.  Buying a low cost index fund that tracks the whole market would have returned an annual return of 11.8%(pre-tax) over the past 77 years.
2. Paying a 1% annual fee to an investment manager over this 77 years period would have cut your final cash balance by 50%!

(Background information:  Mr. Buffett’s first stock purchase was 77 years ago for $114.75)

If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019.  That is a gain of 5,288 for 1.

Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3 billion.

Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to investment managers, its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.

Click below to read the letter.

http://www.berkshirehathaway.com/letters/2018ltr.pdf

WHY THE 70% RULE DOESN’T MAKE SENSE

WHY THE 70% RULE DOESN’T MAKE SENSE


If you listen to mutual fund sales people and most of the mainstream media, you will often hear that people need to replace 70% of their income when they retire. We’ve already discussed why that number is not accurate. The point of this post is to show you exactly why saving to make up 70% of your working income is not necessary.

Let consider the following example.

For a family making $110,000 per year. If they want to live on the same amount of money as when they were working , they will need to save 6% of their income from ages 30 to 65. That would work out to retirement income at 50% of their working income.

If, instead they strive for 70% of their income, they would need to increase their savings from 6% of annual income to 12%, or $13,000 per year. That would mean a significant reduction in spending in their working years (roughly $7800 a year for 35 years).

So during their working and child raising years, they would have only $40,200 a year to spend, after taxes, mortgage, childcare costs instead of $47,000.

When they retire, they would have $65,000 per year to spend, after paying 15% in taxes. That represents 62% more money per year available to them for spending after retirement.

But at what cost? For 35 years, they scrimped and saved, probably not spending on meaningful experiences so they could spend more in retirement. Does this make sense to anyone? Does someone really need to boost spending by 62% at retirement. I know retirees like to travel more, but you can end up saving too much and perhaps missing out on the pleasures that money can sometimes buy.

3% Withdrawal rate appears almost bulletproof to avoid running out of money

Investing articles can be long and boring.  How about I read the article and provide you with the important information for DIY investing success.

Here it is.

If you have the misfortune of retiring when the stock market peaks and you see a big decline in your first few years of retirement, the safest way to ensure your money doesn't run out before you die is to reduce your withdrawals to 3% of your total portfolio value.  So if you have saved $500,000, you withdraw $15,000 to spend this year.  Keep doing the same thing every year growing only for inflation each year.  You will continue to collect and spend your CPP and OAS and any other work or government pension you are entitled to.

Turns out the 3% withdrawal rate is fairly bulletproof to last for your entire life.

Click below to read the full article (you must have a Globe and Mail subscription)

"If you’re nervous about how long your money will last in retirement, you might adopt a withdrawal rate near 3 per cent to include a margin of safety while sticking with low-fee funds. Similarly, being able to tighten one’s belt in hard times or having a part-time job can really help portfolio longevity."

HOW ACTUARIES COME UP WITH THE 50% RULE

HOW ACTUARIES COME UP WITH THE 50% RULE



Many people are surprised when they are told that they can have the same standard of living in retirement as their working years with only 50% of their working years income.

Thankfully, actuaries have researched the spending habits of working age and retired Canadians. I’d like to provide you some evidence of their 50% rule conclusions to help convince you of its accuracy.

First, we will look at the assumptions (taken from Fred Vettese’s The Real Retirement) made when coming up with the 50% rule.
Assumption#1: Married couple with 2 children who own their own home.
Assumption#2: Mortgage costs are averaged over a 30 year period. Child raising costs are averaged over 35 years.
Assumption#3: Income tax, Canada Pension Plan contributions and Employment Insurance contributions are 23% of gross income.

Let’s look at the family making $110,000 per year.

Gross Pay:                  $110,000
Taxes, CPP, EI:              25,000
Child raising costs:       13,000
Mortgage:                      20,000
Savings (6%)                    6,600

Remaining                    $45,400 or 41% of Gross Pay

What does this mean? Only 41% of your gross pay is available to you for regular consumption when you are paying off your mortgage, raising your children and saving for retirement. 59% of your income goes to fixed costs that will eventually disappear. If you managed to live for 35 years with only 41% of your gross income, think how wonderful you’ll feel living on 50% of your income in retirement!

One Big Thing: 74% of Retirement Success is the result of enough savings. Nothing else required.

Investing articles can be long and boring.  How about I read the article and provide you with the important information for DIY investing success.

Here it is.

Don’t obsess over which ETF is better, how much should you allocate to bonds vs. stocks, should you use a RRSP or TFSA, is rebalancing important, etc…

Just save! 6-10% of your pay each and every year from age 25 to 65.

The full article:

“The American Society of Pension Professionals and Actuaries (ASPPA) has an answer.  They published an article in 2011 where they found that 74% of retirement success had to do with one thing: savings rate.  The other 26% was explained by asset allocation and related decisions.”

One Big Thing: 74% of Retirement Success is the result of enough savings. Nothing else required.

Investing articles can be long and boring.  How about I read the article and provide you with the important information for DIY investing success.

Here it is.

Don't obsess over which ETF is better, how much should you allocate to bonds vs. stocks, should you use a RRSP or TFSA, is rebalancing important, etc...

Just save! 6-10% of your pay each and every year from age 25 to 65.



The full article:

"The American Society of Pension Professionals and Actuaries (ASPPA) has an answer.  They published an article in 2011 where they found that 74% of retirement success had to do with one thing: savings rate.  The other 26% was explained by asset allocation and related decisions."

What Retire at 40 Years Old Really Means

There are many blogs providing advice for young people on how to retire early. Basically, their advice boils down to 2 things.

1. Save a large chunk of your income while working in your 20’s and 30’s. By large I mean around 60 or 70% of your income.
2. Plan to live a very modest lifestyle when you “retire” until you become eligible for government social security in your 60’s. By then, you will have become so accustomed to living frugally, nothing will seem different to you compared to the masses who retire from work at age 65 and need to adjust to a reduced income lifestyle.

There is nothing wrong with the advice on these blogs. I’ve written before that my blog will be different but I wanted to add one more thing about the whole retire early phenomenon. Namely, many of the writers of these retire early blogs didn’t actually retire.

I’ll explain using Mr. Money Mustache as an example. He is probably the most popular early retirement blogger in North America. He and his wife quit their jobs as software developers when their son was born. The family lived very frugally while working and set aside much of the family income. They also planned to maintain a low consumption lifestyle while not working for any company. But what they didn’t do was retire from work.

Instead Mr. Mustache starting buying, renovating and selling homes in his neighbourhood. He also started and maintains his very successful blog. Mrs. Mustache became a real estate agent. I would not be surprised if they put in just as many hours “working” now as they did when they were software developers.

So is this actually early retirement? It’s more like freedom to work at things you want to work at, when you want to work. Nothing wrong with that. In fact, this freedom and control would probably go a long way to improving happiness for many stressed out corporate 9 to 5ers.

The point is you can’t expect to save some money until you are aged 40 and then spend the next 50 years relaxing in the sun. That is not realistic and probably not healthy for the vast majority of us.

WHAT RETIRE AT 40 YEARS OLD REALLY MEANS.

WHAT RETIRE AT 40 YEARS OLD REALLY MEANS.


There are many blogs providing advice for young people on how to retire early. Basically, their advice boils down to 2 things.

1. Save a large chunk of your income while working in your 20’s and 30’s. By large I mean around 60 or 70% of your income.
2. Plan to live a very modest lifestyle when you “retire” until you become eligible for government social security in your 60’s. By then, you will have become so accustomed to living frugally, nothing will seem different to you compared to the masses who retire from work at age 65 and need to adjust to a reduced income lifestyle.

There is nothing wrong with the advice on these blogs. I’ve written before that my blog will be different but I wanted to add one more thing about the whole retire early phenomenon. Namely, many of the writers of these retire early blogs didn’t actually retire.

I’ll explain using Mr. Money Mustache as an example. He is probably the most popular early retirement blogger in North America. He and his wife quit their jobs as software developers when their son was born. The family lived very frugally while working and set aside much of the family income. They also planned to maintain a low consumption lifestyle while not working for any company. But what they didn’t do was retire from work.

Instead Mr. Mustache starting buying, renovating and selling homes in his neighbourhood. He also started and maintains his very successful blog. Mrs. Mustache became a real estate agent. I would not be surprised if they put in just as many hours “working” now as they did when they were software developers.

So is this actually early retirement? It’s more like freedom to work at things you want to work at, when you want to work. Nothing wrong with that. In fact, this freedom and control would probably go a long way to improving happiness for many stressed out corporate 9 to 5ers.

The point is you can’t expect to save some money until you are aged 40 and then spend the next 50 years relaxing in the sun. That is not realistic and probably not healthy for the vast majority of us.

Real Research From An Expert Who Isn't Trying To Sell You Anything

 

Malcolm Hamilton is currently a pensions expert and senior fellow at the C.D. Howe Institute. This is his retirement gig. For most of his career he was a actuary working with Mercer.

He is an expert on pensions and retirement savings and has been studying these areas since the 70’s.

He does not sell financial products. Rather, he spends his days teaching about retirement and hopefully correcting the misinformation pushed on to the public by financial marketers. Financial marketers try to convince you to save 15% of your income just like other marketers try to convince you that you need a BMW or Mercedes.

Malcolm Hamilton’s key takeaway is simple. Saving 15% of your working income for retirement means you will have a lot more money to spend in retirement than while you were working and raising the children.

If you can spare the time, and I highly recommend you do, watch this video. Malcolm explains, using real research, why most of what you hear about retirement savings is misleading. This is stressing people out without reason and probably leading to bad financial decisions being made by Canadians.

http://www.moneysense.ca/save/retirement/retire-rich-malcolm-hamilton-on-how-much-canadians-are-saving

REAL RESEARCH BY AN EXPERT WHO ISN’T TRYING TO SELL YOU ANYTHING

Malcolm Hamilton is currently a pensions expert and senior fellow at the C.D. Howe Institute. This is his retirement gig. For most of his career he was a actuary working with Mercer.

He is an expert on pensions and retirement savings and has been studying these areas since the 70’s.

He does not sell financial products. Rather, he spends his days teaching about retirement and hopefully correcting the misinformation pushed on to the public by financial marketers. Financial marketers try to convince you to save 15% of your income just like other marketers try to convince you that you need a BMW or Mercedes.

Malcolm Hamilton’s key takeaway is simple. Saving 15% of your working income for retirement means you will have a lot more money to spend in retirement than while you were working and raising the children.

If you can spare the time, and I highly recommend you do, watch this video. Malcolm explains, using real research, why most of what you hear about retirement savings is misleading. This is stressing people out without reason and probably leading to bad financial decisions being made by Canadians.


http://www.moneysense.ca/save/retirement/retire-rich-malcolm-hamilton-on-how-much-canadians-are-saving

How Much Of Your Income Should You Save

In a recent post, I shared with you that most of us can enjoy a similar standard of living in retirement if we have roughly 50% of our pre-retirement income. This is possible because:

1. We no longer have some major expenses at retirement such as raising children, paying the mortgage, saving for retirement, paying payroll taxes (Employment Insurance, Canada Pension Plan contributions).
2. We may also be able to reduce other expenses like getting rid of a second car, buying lunch every day, and spending money on work clothes.
3. We will start collecting both Old Age Security and Canada Pension Plan payments in our 60’s that will last the rest of our lives and are indexed for inflation.

This 50% number was not a number that I came up with myself. The number came from actuaries like Fred Vettese and Malcolm Hamilton; well respected experts who have studied spending habits for millions of Canadians at different stages of life.

In fact, for many higher income earners (family income in your final year of working above $110,000/ year) the actual replacement percentage is between 41% and 44%. The 50% rate mentioned above includes the greatest swath of Canadians and also creates a little extra cushion to ensure a smooth transition to retirement.

If you still don’t believe me, watch this video for more detail.

So the question remains, how much do you have to save, year after year while working to give yourself an income stream that equals 50% of your working income. The answer varies depending slightly depending on your family income.

In general, you need to save 6-10% of your income depending on your chicken index. That’s all.

For example, if your family income is $110,000/year you could choose to save to save 6% of your income, each and every year for 35 years (age 30 to 65) in order to achieve your post retirement income goal. If you miss a year, you will have to double up the next year to catch up.

Another way to look at this is how much you should have saved by age 65 in order to have enough money to create an income steam that delivers 50% of your pre retirement income.

HOW MUCH OF YOUR INCOME SHOULD YOU SAVE?

HOW MUCH OF YOUR INCOME SHOULD YOU SAVE?



In a recent post, I shared with you that most of us can enjoy a similar standard of living in retirement if we have roughly 50% of our pre-retirement income. This is possible because:

1. We no longer have some major expenses at retirement such as raising children, paying the mortgage, saving for retirement, paying payroll taxes (Employment Insurance, Canada Pension Plan contributions).
2. We may also be able to reduce other expenses like getting rid of a second car, buying lunch every day, and spending money on work clothes.
3. We will start collecting both Old Age Security and Canada Pension Plan payments in our 60’s that will last the rest of our lives and are indexed for inflation.

This 50% number was not a number that I came up with myself. The number came from actuaries like Fred Vettese and Malcolm Hamilton; well respected experts who have studied spending habits for millions of Canadians at different stages of life.

In fact, for many higher income earners (family income in your final year of working above $110,000/ year) the actual replacement percentage is between 41% and 44%. The 50% rate mentioned above includes the greatest swath of Canadians and also creates a little extra cushion to ensure a smooth transition to retirement.

If you still don’t believe me, watch this video for more detail.

So the question remains, how much do you have to save, year after year while working to give yourself an income stream that equals 50% of your working income. The answer varies depending slightly depending on your family income.

In general, you need to save 6-10% of your income depending on your chicken index. That’s all.

For example, if your family income is $110,000/year you could choose to save to save 6% of your income, each and every year for 35 years (age 30 to 65) in order to achieve your post retirement income goal. If you miss a year, you will have to double up the next year to catch up.

Another way to look at this is how much you should have saved by age 65 in order to have enough money to create an income steam that delivers 50% of your pre retirement income.

How Canada Pension Plan And Old Age Security Fit Into Your Retirement Plans

Canada Pension Plan

If you work in Canada, you are already contributing to your retirement savings through the Canada Pension Plan. The government of Canada takes 4.95% of your pay and your employer matches this amount. The money is invested for you. When you retire, you are entitled to receive a monthly payment from the plan, indexed for inflation until you die.

The amount of your Canada pension will depend on how many years you worked between the ages of 18 and 65 and what your yearly income was during this 47 year period. As an example, if you earned at least $56,000 in 39 of the 47 years between your 18th and 65th birthday, you will earn the maximum pension payment of roughly $14,000/year.

If you earn less than $56,000 or work less than 39 years between your 18th and 65th birthdays, your pension will be smaller. You can contact Service Canada to get an idea of what you will be entitled to when you reach 65. You can increase your pension if you wait until 67 or 70 years old to receive it, or conversely, you can start collecting a reduced pension at age 60.

Old Age Security

Every Canadian is entitled to Old Age Security, whether or not you have ever worked in Canada. The yearly payment is roughly $7000/year indexed for inflation. Currently, you can start collecting OAS at age 65. In the next few years, the age of eligibility may increase to age 67. For high income seniors, there are OAS claw backs if they earn more than $72,000 a year.

So combined, CPP and OAS can mean a retirement pension of up to $2100 per person or $42,000 for a couple who earned $110,000/year in 39 of their working years.

This is a considerable amount of money and goes a long way in explaining why many Canadians can enjoy a good retirement by saving 6-10% of their income instead of the conventional 15% advocated by the financial services industry.

HOW CANADA PENSION PLAN AND OLD AGE SECURITY FIT INTO YOUR RETIREMENT SAVINGS

HOW CANADA PENSION PLAN AND OLD AGE SECURITY FIT INTO YOUR RETIREMENT SAVINGS


Canada Pension Plan

If you work in Canada, you are already contributing to your retirement savings through the Canada Pension Plan. The government of Canada takes 4.95% of your pay and your employer matches this amount. The money is invested for you. When you retire, you are entitled to receive a monthly payment from the plan, indexed for inflation until you die.

The amount of your Canada pension will depend on how many years you worked between the ages of 18 and 65 and what your yearly income was during this 47 year period. As an example, if you earned at least $56,000 in 39 of the 47 years between your 18th and 65th birthday, you will earn the maximum pension payment of roughly $14,000/year.

If you earn less than $56,000 or work less than 39 years between your 18th and 65th birthdays, your pension will be smaller. You can contact Service Canada to get an idea of what you will be entitled to when you reach 65. You can increase your pension if you wait until 67 or 70 years old to receive it, or conversely, you can start collecting a reduced pension at age 60.

Old Age Security

Every Canadian is entitled to Old Age Security, whether or not you have ever worked in Canada. The yearly payment is roughly $7000/year indexed for inflation. Currently, you can start collecting OAS at age 65. In the next few years, the age of eligibility may increase to age 67. For high income seniors, there are OAS claw backs if they earn more than $72,000 a year.

So combined, CPP and OAS can mean a retirement pension of up to $2100 per person or $42,000 for a couple who earned $110,000/year in 39 of their working years.

This is a considerable amount of money and goes a long way in explaining why many Canadians can enjoy a good retirement by saving 6-10% of their income instead of the conventional 15% advocated by the financial services industry.

DO I NEED TO SAVE FOR RETIREMENT IF I HAVE A COMPANY PENSION PLAN?

DO I NEED TO SAVE FOR RETIREMENT IF I HAVE A COMPANY PENSION PLAN?



First of all, consider yourself lucky that you are one of the few remaining workers in Canada that can still count on a pension plan at work. The once common defined benefit pension plan that paid out a guaranteed amount to a retiree every year until death is quickly dying out. In its place, most employers will offer to match any retirement contributions you make to your RRSP, up to a certain amount and then it’s up to you to decide what to do with this savings.

If you are extra lucky, your defined benefit pension pension also increases its yearly payment to you based on the rate of inflation. An “indexed” pension is the gold standard and very few people have one.

To answer the question above: if you have an indexed pension plan and you will have qualified for a full pension, usually after 30+ years of continuous service, there is no need to save further for retirement. Pensions use different methods of determining what your yearly payment will be, but after 30+ years of working, your pension will most likely be around 60% of your working years income. This is more than the 50% rule that we are striving for, so you don’t need any other savings.

Just make sure you have paid off all your debts, including your mortgage before your retire.

If you do not have enough qualifying years for a full pension, because you started your career late or took time off to raise a family, you may or may not need to suplement your pension plan savings to make sure you have enough to retire comfortably.

The Mighty Vanguard Does It Again!

Vanguard Canada just launched its newest and easiest low cost index funds and they are spectacular.  They are designed to be easy to buy and hold with the absolute minimum of required attention.

From Rob Carrick at the Globe and Mail:

”  The Vanguard Conservative ETF Portfolio (VCNS) has a 40/60 mix of stocks and bonds, respectively, the Vanguard Balanced ETF Portfolio (VBAL) has a 60/40 mix and the Vanguard Growth ETF Portfolio (VGRO) is 80/20. Each has a management expense ratio that should come in around 0.24 per cent, less than one-quarter the cost of the average comparable balanced mutual fund.”Each packs a globally diversified portfolio covering stocks and bonds into a single fund – a “one-ticket” solution, as they say in the investing biz.The portfolios are rebalanced frequently to keep the target mix intact”

Now what’s your excuse for not running down to you bank, asking to set up a self directed trading account and buying one of these 3 beauties? Repeat every year with 10% of your income until you’re 65 and you’re set.

The Mighty Vanguard Does It Again!

Vanguard Canada just launched its newest and easiest low cost index funds and they are spectacular.  They are designed to be easy to buy and hold with the absolute minimum of required attention.

From Rob Carrick at the Globe and Mail:

"  The Vanguard Conservative ETF Portfolio (VCNS) has a 40/60 mix of stocks and bonds, respectively, the Vanguard Balanced ETF Portfolio (VBAL) has a 60/40 mix and the Vanguard Growth ETF Portfolio (VGRO) is 80/20. Each has a management expense ratio that should come in around 0.24 per cent, less than one-quarter the cost of the average comparable balanced mutual fund."Each packs a globally diversified portfolio covering stocks and bonds into a single fund – a "one-ticket" solution, as they say in the investing biz.The portfolios are rebalanced frequently to keep the target mix intact"

Now what's your excuse for not running down to you bank, asking to set up a self directed trading account and buying one of these 3 beauties? Repeat every year with 10% of your income until you're 65 and you're set.