For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).
For a while now I’ve dithered over when to sell my portfolio of dividend stocks and implement my two-fund ETF solution. The tanking stock market didn’t help – particularly with oil and gas stocks plummeting and a few of my holdings underwater. Behaviourally, I badly wanted to wait until oil prices recovered so I didn’t have to sell those stocks at a loss.
But last Thursday I finally took the plunge and sold 24 dividend stocks, worth roughly $100,000, and immediately replaced them with two ETFs from Vanguard. I’m not going to lie; it was hard to sell my babies:
Finally did it. Sold all of my dividend stocks. Feels like a part of me died today.
Recently I have been doing retirement assessments for several new customers. What amazed me as I spoke with them was how resigned to defeat the clients were. It was like they knew in their guts that they had started saving too little and too late to attain the retirement they wanted.
One answered my question on when do you want to retire by saying “around 120 is the only way I could.”
After the initial meetings I reflected on other circumstances from planning for customers in 2014 and noticed some commonalties.
Age range: 45-55
They own homes with attractive Fair Market Values
Had fairly decent equity positions in homes
Most would carry a mortgage into retirement
All had projected incomes at retirement far less than their desired outcome
Many Canadians, including these clients, have grown up with the belief that home ownership is an important goal. The home represents a significant part of their net worth.
One day as I was perusing the world wide web, I came across a posting about DRIP investments, which ran in the new blog by PWL Capital’s Justin Bender.
What caught my eye had nothing to do with DRIP investments but more about a comment made at the end of article that really got me thinking. It said:
“…Investors should be focusing their attention to more important investment decisions that are likely to have a bigger impact on overall success (such as savings rate, expenses, risk, fees, taxes, and behaviour)…”
Make no mistake, these are important factors in developing your investment ideology or strategy. However, these elements just get you into the game of investing; on their own they are not going to guarantee you will be successful. Continue Reading…
I know it’s tough to save money. It’s even more difficult to up the ante and increase your savings year-after-year. But saving is necessary to meet both our short- and-long-term financial goals. Without any savings, and living paycheque-to-paycheque every month, you’ll either work until you die or else retire in extreme poverty.
So what will it take for you to save more this year? Some people start off small, saving two or three per cent of their salary, and that’s fine – every little bit counts. But many of us short-change our retirement by not finding ways to increase that amount every year. Here are four easy ways to save more in 2015:
Ah, life was so simple when all we had were Defined Benefit pension plans! I sometimes envy my late father, who only had to invest in GICs (Guaranteed Investment Certificates) to supplement his inflation-indexed Ontario Teachers pension. Just like a salary, that guaranteed pension flowed in like clockwork, including a healthy survivor’s benefit after my father predeceased my mother.
Unfortunately, such pensions do not pass to the next generation and it’s becoming harder to find employers that offer new employees DB plans: even if you’re fortunate enough to be in one, you may be subjected to pressures to switch to a Defined Contribution Plan, putting stock-market risk squarely on the pensioner’s shoulders instead of the employer’s.
Decumulation Issues similar with RRSPs and RRIFs
Since RRSPs behave quite similarly to DC pensions, the issues are almost the same, both on the wealth accumulation side as well as what we call the Decumulation side. (Here at the Hub, we have sections devoted to blogs on either topic).
Unlike DB plans, members of DC plans need some employer-supplied education so as to optimize both the wealth accumulation as well as the ultimate decumulation that is the ultimate raison d’être of any pension. Por says an OECD study found most employer communications programs about DC pensions were rather ineffective in improving the behaviour of the plan members when it came to investing decisions. The average score of such programs was only 10 out of a maximum 100. (a range of 50-60 is considered effective).
Anyone near retirement and without significant income from old-fashioned DB plans well knows the stress of seeing RRSP or RRIF values fluctuate with financial markets. As Por notes, one reason for the disappointing DC scores is this:
Plan members are expected to make complex decisions about an uncertain future … Members are expected to make the same or even more difficult decisions as chief investment officers (CIOs) of large pension funds.
His fifth point is also instructive:
Educators fail to recognize the inherent challenge of overcoming limitations imposed by human nature, such as people’s hard-wired biases and heuristics.
Most DC plans do a good job educating members in the Accumulation years. Por says default options can guide more than 80% of members to a well-diversified efficient portfolio at low costs. But it all breaks down just when the money is needed at retirement:
Unfortunately, much of this support disappears at the decumulation decision— the very point where complexity explodes. Yet 60 cents of every retirement dollar are paid by returns earned after retirement as the direct result of decumulation decisions.
Por delves into behavioural economics, noting that one reason retirees shy away from annuities is that they “discount” the value of the tradeoff involved in converting capital to long-term secure income stream that should last 20 or 30 years.
While Por’s focus is DC plans, remember that the decumulation issues are also quite relevant for those planning for the transition from RRSPs to Registered Retirement Income Funds (RRIFs). But with 9 million Canadians set to retire in the next 15 or 20 years, he’s optimistic that employers and financial institutions will rise to the Decumulation challenge:
Canadian society will produce 1,500 retirees every working day for the next 20 years, and financial institutions have an overriding interest in serving them. As these institutions vie for asset decumulation, competition will result in better financial products and more effective education efforts.
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