RUNNING OUT OF MONEY: HOW TO HANDLE THE RISK

RUNNING OUT OF MONEY: HOW TO HANDLE THE RISK



The financial industry likes to scare people into saving more money than necessary. The pitch goes something like this: If you don’t save 15% of your working income, you may run out of money before you have the good sense to die. They do this because every dollar you save, they shave off 2 or 3 percent for themselves. It’s not wrong to encourage people to save more, but as we’ve talked about on this blog it means you will have to make real sacrifices when you are younger and raising a family.

There are ways to reduce people’s fear of running out of money and still not over save for retirement. You probably won’t hear any of these recommendations from banks and mutual fund salespeople.

1. Buy your home and have the mortgage fully paid off before you retire. In a pinch, the equity in the home can be converted to income.

2. Keep your investing costs low. Instead of purchasing high cost mutual funds that rarely beat the market, purchase low cost index funds instead. The cost differential is huge and can mean tens and possibly hundreds of thousands of dollars more for you when you retire.

3. Keep your employment skills sharp. If you stay valuable to your employer, you significantly reduce the risk of being forced out of a job before age 65.

4. Start collecting your Canada Pension Plan later in life. 65 years old is the standard age when most start collecting CPP. Each year you delay CPP, your payment increases 8.4%. So if you wait until age 70 to collect, your monthly payment will be 42% higher. Remember CPP is guaranteed for life and fully indexed for inflation.

5. Start collection Old Age Security later. Instead of starting to collect at age 65, wait until age 70 and your monthly payment increases by 21.6%.

6. Consider part time work or small business after age 65. Many people find full time retirement less fulfilling than expected. You could find part time work in a field that you find interesting. Even earning $11 or $12 an hour part time can add up to $12,000/year.

"SET IT AND FORGET IT"

“SET IT AND FORGET IT”

If you are of a certain age, you will probably remember late night commercials for the Showtime Rotisserie that encouraged TV watchers to “set it and forget it”. The Showtime Rotisserie sold millions of units and made its owner and main pitchman Ron Popeil very rich.

I never succumbed to the temptation to buy a Showtime Rotisserie but I do think Ron`s pitch to “set it and forget it” makes a lot of sense when it comes to saving for retirement. A lot of research shows that investors who buy and sell frequently end up making a lot less money than others who leave their investments (preferably low cost index funds) untouched for years and even decades.

Altogether too much time and energy is spent trying to guess which way the “market” will go. This is unknowable and the events of the last few years clearly proves this. Very few highly paid market analysts predicted the crash of 2009. So instead of spending time trying to predict the unpredictable, follow the common sense, less stress method for investing explained in this blog.

The key to successful retirement saving is consistency over many years – 40 years in fact. Making sure you remain a valuable employee or a successful business owner over your working career is a lot more valuable than spending time guessing what will happen to interest rates or oil prices.

If you continue to earn and continue to invest your set percentage in low cost index funds for 40 years, you will be prepared financially for retirement. If you have some free time along the way, focus on other predictors of retirement happiness – physical fitness, healthy diet and maintaining social relationships.

"SET IT AND FORGET IT"

"SET IT AND FORGET IT"



If you are of a certain age, you will probably remember late night commercials for the Showtime Rotisserie that encouraged TV watchers to “set it and forget it”. The Showtime Rotisserie sold millions of units and made its owner and main pitchman Ron Popeil very rich.

I never succumbed to the temptation to buy a Showtime Rotisserie but I do think Ron`s pitch to “set it and forget it” makes a lot of sense when it comes to saving for retirement. A lot of research shows that investors who buy and sell frequently end up making a lot less money than others who leave their investments (preferably low cost index funds) untouched for years and even decades.

Altogether too much time and energy is spent trying to guess which way the “market” will go. This is unknowable and the events of the last few years clearly proves this. Very few highly paid market analysts predicted the crash of 2009. So instead of spending time trying to predict the unpredictable, follow the common sense, less stress method for investing explained in this blog.

The key to successful retirement saving is consistency over many years – 40 years in fact. Making sure you remain a valuable employee or a successful business owner over your working career is a lot more valuable than spending time guessing what will happen to interest rates or oil prices.

If you continue to earn and continue to invest your set percentage in low cost index funds for 40 years, you will be prepared financially for retirement. If you have some free time along the way, focus on other predictors of retirement happiness – physical fitness, healthy diet and maintaining social relationships.

REBALANCING YOUR SAVINGS

REBALANCING YOUR SAVINGS

Rebalance your 3 index funds once per year so you keep the 1/3 Canadian stocks , 1/3 world stocks and 1/3 Canadian bonds.

In a past post, I told you to purchase low cost index funds from Vanguard Canada or Ishares Canada using the split you see below.

Invest 1/3 in a low cost all Canada stock index fund
Invest 1/3 in a low cost all world stock index fund
Invest 1/3 in a low cost Canadian bond fund

This was before Vanguard introduced their one stop shopping funds that do all the rebalancing for you. 

However, if you still choose to buy the individual Vanguard funds (VCN, VXC, VAB), then you’ll have to rebalance from time to time.  Here’s an explanation on how it could be done.

Over time, the one third/one third/one third balance may change if, for example Canadian stocks outperform world stocks, or the stock market crashes (as happened in 2008) and Canadian bonds significantly outperform stocks.
When this happens, it is important to try to maintain that proper balance by changing how much you buy of each fund in the following year.

So if you notice that your mix is now 40% Canadian stocks, 40% World stocks and only 20% Canadian bonds this year, next year buy only Canadian bonds to boost the percentage of bonds in your savings.
If the mix has really gotten out of whack, for example, after a market crash, you may need to sell some of your Canadian bonds and redirect that money to Canadian and world stocks.

You may be asking why go through the hassle of rebalancing. We’ll according to much research by academics, rebalancing has a fairly significant positive effect on overall investment success. Some say it the only “free lunch” in investing.

Because your savings are in tax sheltered accounts, you won’t pay tax on your profits when you rebalance and the brokerage fees to buy and sell and very reasonable (between $6 and $30, depending on your discount broker and the amount of your savings).

REBALANCING YOUR SAVINGS

REBALANCING YOUR SAVINGS


Rebalance your 3 index funds once per year so you keep the 1/3 Canadian stocks , 1/3 world stocks and 1/3 Canadian bonds.

In a past post, I told you to purchase low cost index funds from Vanguard Canada or Ishares Canada using the split you see below.

Invest 1/3 in a low cost all Canada stock index fund
Invest 1/3 in a low cost all world stock index fund
Invest 1/3 in a low cost Canadian bond fund

This was before Vanguard introduced their one stop shopping funds that do all the rebalancing for you. 

However, if you still choose to buy the individual Vanguard funds (VCN, VXC, VAB), then you'll have to rebalance from time to time.  Here's an explanation on how it could be done.

Over time, the one third/one third/one third balance may change if, for example Canadian stocks outperform world stocks, or the stock market crashes (as happened in 2008) and Canadian bonds significantly outperform stocks.
When this happens, it is important to try to maintain that proper balance by changing how much you buy of each fund in the following year.

So if you notice that your mix is now 40% Canadian stocks, 40% World stocks and only 20% Canadian bonds this year, next year buy only Canadian bonds to boost the percentage of bonds in your savings.
If the mix has really gotten out of whack, for example, after a market crash, you may need to sell some of your Canadian bonds and redirect that money to Canadian and world stocks.

You may be asking why go through the hassle of rebalancing. We’ll according to much research by academics, rebalancing has a fairly significant positive effect on overall investment success. Some say it the only “free lunch” in investing.

Because your savings are in tax sheltered accounts, you won’t pay tax on your profits when you rebalance and the brokerage fees to buy and sell and very reasonable (between $6 and $30, depending on your discount broker and the amount of your savings).

THE IMPORTANCE OF AN EMERGENCY FUND

THE IMPORTANCE OF AN EMERGENCY FUND

Rule#2 Build up an Emergency Fund of 6 months living expenses.

Like it or not, life is full of little surprises, some good and some not so much. If you don’t plan for the bad surprises, your retirement goals can go out the window quickly. Life and disability insurance is a big part of planning for the unexpected events. This specific blog is about building up an emergency fund before starting to save for retirement. We’ll talk about insurance later. Emergency funds are actually very straight forward.

Figure out how much money you and your family need to survive for 6 months assuming all your income streams have stopped. Make sure you include everything: food, shelter, debt payments, transportation, clothing, etc.

When you get to that amount, start working on saving that amount of money. Put the money in a plain vanilla bank account with one of the big Canadian banks, hopefully one that pays some interest and don’t touch that money unless a real and true emergency affects your life.

A last minute trip to Florida after a stressful winter does not constitute an emergency. Losing a job, becoming injured or having to take time off to help a sick relative do. There is a pretty good chance one of these things will happen to you at some point in your working career. Be ready for it.

THE IMPORTANCE OF AN EMERGENCY FUND

THE IMPORTANCE OF AN EMERGENCY FUND

Rule#2 Build up an Emergency Fund of 6 months living expenses.

Like it or not, life is full of little surprises, some good and some not so much. If you don’t plan for the bad surprises, your retirement goals can go out the window quickly. Life and disability insurance is a big part of planning for the unexpected events. This specific blog is about building up an emergency fund before starting to save for retirement. We’ll talk about insurance later. Emergency funds are actually very straight forward.

Figure out how much money you and your family need to survive for 6 months assuming all your income streams have stopped. Make sure you include everything: food, shelter, debt payments, transportation, clothing, etc.

When you get to that amount, start working on saving that amount of money. Put the money in a plain vanilla bank account with one of the big Canadian banks, hopefully one that pays some interest and don’t touch that money unless a real and true emergency affects your life.

A last minute trip to Florida after a stressful winter does not constitute an emergency. Losing a job, becoming injured or having to take time off to help a sick relative do. There is a pretty good chance one of these things will happen to you at some point in your working career. Be ready for it.