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/

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.

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.

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

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.

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

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.

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.

How Much Your Need To Save For Retirement

It depends. You want to save enough so you can have a secure retirement but not too much that you deprive yourself during your working years. How much to save depends on a bunch of different things like your yearly family income, are you married or not, do you have children, will you keep working until age 65, and do you own your home.

The common wisdom is you will spend roughly 70% of your yearly income when you retire. For example, if your family income is $100,000 average during your working years, you will need to spend $70,000 a year to maintain your standard of living in retirement.

The problem with this 70% number is it makes it very difficult to save enough while working unless you dramatically cut expenses when you are young. It also doesn’t take into account the fact that you won’t be supporting your children, or have a mortgage in your 60s and 70s.

Actuaries has been studying spending habits as we age for years. Their conclusions are very enlightening and reassuring. Basically, after taking into account the drop in “fixed” expenses like your children and mortgage, the vast majority of people will only need to replace between 40% and 50% of their working income in retirement*. Don’t forget, you will also be entitled to Old Age Security (OAS) and Canada Pension Plan (CPP) in your 60s that will add to your income.

At this level of income, retirees can enjoy the same living standards they had while working. The studies also showed that people did not change their spending habits much after retiring so living the same way you did when you were younger is quite a reasonable expectation. In fact spending actually decreased significantly in later stages of retirement as age and health issues make it harder to spend the same amount of money as you did as a “young” retiree.

What does this all mean for you?

Despite what you might hear in the media, collectively we are not all doomed to a subsistence retirement, as long as you save enough to replace roughly 50% of your income for retirement.

That’s sound better, but how much do you need to save every year while working to reach that 50% target?  In order to have the same lifestyle in retirement as when you were working, you will need to save 6-10% of your yearly income each and every year from age 25 to 65. No excuses.  10% is more conservative and will even allow a cushion for the chance that you are without a job for a short while at some point.

* If you are interested in finding out more about how I reached this 40% to 60% replacement rate, read “The Real Retirement” by Fred Vettese. He goes into wonderful detail about the data and research.

It Doesn't Really Matter

My second ever rock concert was to watch the 80’s glam band Platinum Blond. Their big hit was called “It Doesn’t Really Matter”.  I find myself repeating that line in my mind when I’ve been asked some financial questions over the years.  The most common questions I get from students, former students, colleagues, family and friends that make me think “Platinum Blonde” include:

Which Canadian etf should I buy – XIC, XIU and VCN (all Canadian low cost etfs)?
How much should I save for retirement – 6%,10%, 15% or some other amount?
How often should I rebalance my etfs- twice a year, once a year, or longer?
When should I buy the etfs – all at once, or little bit throughout the year?
Do I need to buy European, Japanese and emerging market etfs?
Which discount broker should I use – big bank broker (eg. Scotia Itrade), or independent broker (Questrade)?

In my mind I’m thinking that these people asking these questions are already winning the investing game.  They’ve decided to take the time to learn how to DIY Invest.  They have decided not to become the suckers that the big banks, mutual fund companies and even financial advisors rely on to pay for their lifestyles.

If you are one of these folks, congratulations!!  The fact you are asking very specific questions on the nuts and bolts of DIY Investing means you are already 95% of the way there to retiring comfortably.
These questions listed here are the other 5% and that is why the answer to these questions typically is

“It doesn’t  really matter”; just do what is easier for you and what improves the chances that you will continue to save 6-15% of your income in low cost etfs until you reach retirement age.
In any case, here are how I’d answer the questions:

The difference between XIC, XIU, VCN is insignificant.  Buy one and stick with it.

Save between 6% and 15% depending on your chicken index.

Try to rebalance once per year, but if you forget, do it when you remember to.

I’d buy my Canadian etf first when I have the money, then I’d buy my International etf when I have the next block of money, and then finally my Canadian bond etf.   3 purchases during the year; that’s it, no more trading.

If you are more comfortable sticking only to Canadian and US stocks, that’s okay. I’ve seen analysis that adding non North American stocks to your portfolio has not significantly boosted returns since 1970.   Remember Warren Buffett will put all his money in the US broad market when he can no longer invest for himself.

If you like the convenience of setting up a brokerage account with your personal bank, then do that.  You pay a little more each time to buy an etf, but since you won’t be trading and will make few purchases, the extra cost is not significant.

Yale University Investing Advice

David Swensen is an investing superstar.  He manages Yale University’s endowment which is valued at over $22 billion.  Over the past two decades, Yale’s endowment has grown an average of 16.8 percent a year, more than any university, foundation or pension fund.  Here is some of his advice for individual investors to D.I.Y. invest.

Paying for Advice :

“Paying up to 1.25 percent of the total investment. That means an investor with a half-million dollars invested in a retirement 401K would end up paying about $6,250 a year in fees.

Over 20 years, that person is losing hundreds of thousands of dollars because of fees. Of course, that’s better than not investing at all, and a lot of people want an adviser to help them.  Most of these investment services provide pretty mediocre advice, and it’s just not worth giving them a percentage of your life savings.

That’s the wrong path and the reason it’s the wrong path is it’s a very, very expensive path.”

What to Invest in:

“Fees are also the big reason you should buy index funds instead of classic mutual funds. Index funds, which track market segments like the S&P 500, are a lot cheaper. The vast majority of professional mutual fund managers fail to beat those indexes.

When you look at the results on an after-fee, after-tax basis over reasonably long periods of time, there’s almost no chance that you end up beating an index fund the odds are 100 to 1.

Don’t try to pick individual stocks, instead pick nonprofit funds like Vanguard”

The Most Important Advice from Warren Buffett's 2017 Annual Letter to Shareholders

Mr. Buffett, as usual, has lots of useful advice to help ordinary investors improve their investing skill and increase the odds of success in achieving investment goals.

From this year’s letter, he addressed the fact that stocks will go down from time to time and instead of panicking, we should follow Rudyard Kipling’s advice.

“When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:

If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you
Yours is the Earth and everything that’s in it.”

WHAT HAPPENS TO MY RETIREMENT GOALS IF I LOSE MY JOB

WHAT HAPPENS TO MY RETIREMENT GOALS IF I LOSE MY JOB

A few commentators have criticized the idea of saving less than the usual 15% recommended by the financial services industry. I’ve already explained how saving so much means you will need to make big sacrifices when you are young and raising a family. In fact, you will have more money available to spend when you are retired at 65 years old than you had when you were working.

This doesn’t make sense to me. Instead you should strive to have a similar income throughout your working and retired life. Fred Vettese, one of my investingbs.com hall of fame members calls this your Neutral Retirement Income Target. For most families this can be achieved by saving 6-10% of your pay while you are working.

Research shows that people maintain the same spending habits as they age. So increasing your disposable income by 50+% in retirement means you probably could have done other things with your money in your 30’s, 40’s and 50’s without jeopardizing your golden years.

The most common criticism I’ve heard deals with job loss over the 35 year period that you will be working and saving for retirement. The argument is if you become unemployed and are unable to set aside money for retirement while looking for a new job, you may end up not having enough money to retire on and maintain your lifestyle.

My response is:

1. An event like job loss is exactly why the emergency fund is so important. Setting aside 6 months worth of expenses in a plain bank account means you will not fall into debt as you search for a new job.

2. The concern of job loss is exactly why you need to make sure that you keep up your employment skills. This is the best way to avoid an extended stretch of unemployment. Even the most valuable employees can be let go by a company facing difficulties, but the ones who have kept up their skills and value will find work quickly somewhere else.

3. North America will soon face a demographically driven worker shortage that will last decades. We are aging quickly and we will need more workers than we have available to us. Immigration to North America will help, but there is not one demographer that I have researched who believes that will be enough to fill the gap. The result is high quality workers will become more valuable and should experience lower levels of unemployment.

If a person is still unemployed for a extended period of time, then their living standard would need to be lowered and this would mean less money available now and into retirement. The person would have to become accustomed to this lower standard.

The possibility of the worst case scenario is still not a sufficient reason to over save for 35 years.

There are ways to mitigate the risk.

WHAT HAPPENS IF WE THINK WE CAN’T SAVE ENOUGH FOR RETIREMENT AND STILL HAVE A LIFE?

WHAT HAPPENS IF WE THINK WE CAN’T SAVE ENOUGH FOR RETIREMENT AND STILL HAVE A LIFE?

What’s the harm in saving 15% of your income for retirement? Many will argue, especially those who work in the financial services industry, that just to be sure, you can never save too much. Having too much money saved when you are 90 years old is a much better problem than not having enough money.

However, when we scare young people into believing they won’t be able to retire because they are not saving 15%, they sometimes make irrational, fear based decisions. The most dangerous of these decisions could be not to have any children, or have only 1 child instead of 2 or 3.

If the financial press and marketers convince enough young people that they can’t afford to be a parent, have a life AND retire in comfort at a reasonable age, then our whole country is doomed. We absolutely need to have at least enough children to keep the population of Canada from shrinking. Immigration can help a little bit, but it cannot save us if people stop having children.

Without enough young people to keep Canada working, our economy starts to flat line and eventually may collapse. Before you say this will never happen, it’s already started to cause economic problems in countries like Korea, Japan, and Italy.

We need young people to work, to build, to innovate, to start new businesses all to support seniors. Working and raising a family is already a challenge. We need to encourage this choice and reward those young people who are helping to keep Canada vibrant and economically strong into the future.

Young people need help to make good financial decisions and this can happen by providing them with unbiased information about retirement saving that proves to them they can have all the joy and challenge or raising a family and still afford a comfortable retirement at age 65.

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.

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.

OTHER ASSETS AVAILABLE TO BOOST RETIREMENT INCOME

OTHER ASSETS AVAILABLE TO BOOST RETIREMENT INCOME

Much of what you read about saving for retirement forgets to include a valuable source of income that can be unlocked if needed. Just like a piece of coal can be burned to create energy, these assets can be released to create cash.

So, on top of retirement savings held in your TFSA and/or RRSP, your government pension (CPP), Old Age Security (OAS), and any company pensions, you shouldn’t forget other assets you or your family may have accumulated in your lives.

The primary asset many will have when they reach retirement age is a mortgage free home. There are more than a couple ways you can unlock the equity in your home.

First, you call sell the home and downsize to a less expensive home. They could also take out a reverse mortgage on the equity of the home. There are pros and cons to this idea. Typically the interest rate is higher on reverse mortgages and the fees to set up the reverse mortgage and substantial.

You could also sell and move to a retirement community where you purchase the physical home but not the land the home sits on. This concept unlocks a considerable amount of cash if you live in or around a large city like Toronto or Vancouver.

For example, my parents live in Markham, Ontario and could sell their condo for roughly $600,000. They could move down the street to a retirement community and pay roughly $220,000 for a 2 bedroom townhome. They would be allowed to stay in the home until they both die. At that time, the unit would revert back to the non profit organization that owns the community. The cost of the townhome is determined by the age and health of the individual seniors who are considering making the purchase.

Examples of other assets that could finance retirement are a cottage, rental property, business equity, other savings and any inheritance you may expect.

While not everyone has these other assets, many do and any discussion on how much to save for retirement should not forget these other assets.

SCARE TACTIC #1: YOU DON’T KNOW ENOUGH TO D.I.Y.

SCARE TACTIC #1: YOU DON’T KNOW ENOUGH TO D.I.Y.

There are times when I read articles about finance or investing and my mind starts to wander.  I try to stay focused but the articles can sometimes be so complicated and so boring, I can’t help myself.  Or I”ll be reading an article that starts off interesting but gets boring when a so called expert makes a prediction on where the price of oil or stocks will be 6 months from now.   I’m getting pretty good at skipping right over those silly statements.

Despite my concentration limitations and lack of deep, sophisticated knowledge of financial markets, I have been a successful D.I.Y. investor for over 25 years.  How can this be?  We’ll I think Warren Buffett summed it up beautifully when he wrote two things: “There are no bonus points for complicated investments” (Letter to Shareholders 2008) and  “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” (Letter to Shareholders 1989).

To this I would add “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”  (Letter to Shareholders 1996).

That’s pretty much all you need to know.  So in practical terms, stick to a simple buy and hold strategy of low cost index funds, make regular purchases of between 6 and 10% of your income for a period of 40 years and you’ll have a wonderful retirement when you reach age 65.

Remember the experts will try to convince you that you don’t know enough and will need their very expensive guidance to successfully invest.  All the research I’ve read convinces me that this will mean less money in your pocket at the end of a your long working career.  Thankfully, there is a easy way to avoid being the sucker.