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.”

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):


What Warren Buffett will do with his money when he dies

Warren Buffett is widely regarded as the best stock picker in the world. For over 50 years he has very successfully operated Berkshire Hathaway as a holding company purchasing companies trading primarily on the New York Stock Exchange.

When Warren is no longer buying and selling, he will place all his family money into only 2 investments: 90% will go into a index fund that tracks the 500 largest companies in America (S&P 500 ETF) and 10% will go into cash. That’s it. The world’s best investor knows how it is virtually impossible for normal folks who are not experts to beat the market.

You and I are not Warren Buffett. When I was a kid, I thought I was good enough to become a major league baseball player. Soon enough, I realized that would never happen. Thinking you can buy and sell stocks when your competition are guys like Warren Buffett is almost as crazy as my dream of playing for the Blue Jays.

Most professional money managers can’t do it. There is a lot of research that shows the vast majority of “professionals” can’t beat the performance of a low cost exchange traded fund like the Vanguard All World Index ETF.

So why even try? Is you mess up with your buying and selling, and there is a very good chance you will, you risk not having enough money for retirement.

By buying the whole index and following the set it and forget it investing plan, you will outperform 75% of mutual funds consistently.

One last point: You know that hot mutual fund that has beaten the market the past 5 years that financial press keeps talking about? Chances are it will under perform the broad market during the next 5 years. It’s called reverting to the mean and it’ll happen as soon as you give them your money.

Robots vs. the Canada Pension Plan

Humans are not robots.  They don’t always make rational decisions.  If you don’t believe this then you probably believe that the federal government’s plan to boost Canada Pension Plan (CPP) contributions and payouts doesn’t make sense.  In a perfectly rational world, Canadians will simply reduce their savings elsewhere to balance out the extra contributions they and their employers will make.

In the real world, there are many Canadians who  have not been saving enough for retirement but will be saving more now because they are forced to do so.  They will have a little more money taken off their pay cheques to pay for this increased saving but they will hardly notice.  I really don’t want to get into the pros and cons of forced savings programs like the CPP because there are actually good arguments on both sides of the debate.

What I’d like to focus on instead is the psychological benefits of knowing that you have a pension waiting for you when you retire and how this can actually make you richer over time.  I will use my own financial situation and my experience teaching CPP to new immigrants as examples to prove my point.

My Experience

As many of you know, I am a teacher and I am obligated to contribute 12.5% of my pay to my pension every year I teach.  In return, I am guaranteed a pension of anywhere from 50-60% of my annual salary, depending on how many years I teach (eg.  25 years of teaching to receive 50% pension).

As a result of knowing this pension is waiting for me and it is being managed by some pretty smart people, I have become more willing to take on more risk with my other investing, have felt confident enough to consume more goods and services than I otherwise would have, and have not panicked and sold my investments in a market downturn.  In fact, I have been a buyer of stocks in every downturn since 2002.  The psychological relief of knowing that my retirement funds are not in jeopardy is huge.

My Teaching Experience

Every year I teach a large group of new immigrants to Canada about CPP and Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).  Almost all my students have low paying jobs and have never heard of any of these programs.  When I ask them what they plan on doing for money when they get older, they have no idea and this causes them stress.  I can see the worry in their eyes because they know how expensive it is to live in a country like Canada (nevertheless, they are so extremely grateful to be here).

Then  I begin explaining each program starting with CPP and ending with GIS with real life calculations that shows what they can expect to earn from these programs starting at age 65.  By the end of the class, there is relief and almost a sense of joy in the class.  They had no idea that by working at even a minimum wage job for 25 or 30 years, they will end up with a decent retirement income.  The knowledge inspires them to go to work and keep working day after day, year after year.  They also understand the value of not working in the underground economy (“for cash”).  That is the value of programs like CPP.

I think boosting CPP payouts will help more people feel less anxiety about growing old.  People cannot stand the unknown.  There are just too many bad things that could happen that can consume our imaginations.  When people are afraid they find ways to reduce their fear like selling stocks in a bear market, keeping more money in cash, and reducing spending on goods and services, etc.  Boosting CPP payments may reduce the urge to make bad investing and spending decisions in times of uncertainty.

Career Advice to Improve the Odd Of Retiring Well

I’ve already blogged that the key to a comfortable retirement is more about staying gainfully employed for as long as possible. If you can do this until age 65, at a job you enjoy even if that job isn’t the highest paying job, and save 6% of your income, you will go a long way to achieving a good quality retirement.

To this end, I’d like to offer some career advice, as a worker in his late 40’s with 24 years of varied work experience.

Here goes:

1. Find a job where you’re surrounded by people you like to hang around with. Any job is a lot more pleasurable when you genuinely like the people you work with. Rule of thumb: if you socialize after work with the same people you work with, you probably will like going to work.

2. Be real careful before becoming a manager. Managing is hard and it hurts point #1 above. When you become the manager, your relationships change. You may have no choice, especially if you’re worried that if you don’t become the manager, some jerk will get the job and he’ll make your life more difficult.

3. At some point, you’re going to have a boss who is a psychotic jerk. Make sure you always keep your options open to jump to another department, or company if necessary. You don’t want to waste years of your life being miserable at work waiting for the manager from hell to leave/quit/get hit by a bus.

4. Trying to find a job that is your passion is, pretty much, a waste of time. Instead, try to find something that you find interesting most of the time and is actually doing some good, or at least little bad to your community. Expecting to find a passion that will make each and everyday day seem like it’s not work but pure pleasure is more than a little unrealistic; unless you’re a nut like Steve Jobs.

5. Somewhat related career advice. Don’t get trapped into an expensive lifestyle that makes it all but impossible to leave a job you no longer like. Avoid the rush that comes with making big purchases. The thrill goes away quickly, but the debt stays forever! Also, if you’re going to marry, make sure your spouse is on the same page when it comes to money. Don’t marry a spendthrift because it’s going to become a real problem down the road. I’ve seen it many times. Don’t think you can change the other person and divorce is real expensive, financially and emotionally.

6. Avoid long commutes to work. Commuting in heavy traffic is psychologically damaging. It’s doable when you’re young and don’t have much responsibility at home; you can come home relax and recharge. However, when kids come into your life, commuting will damage you. You have two jobs now and the commute is wasted time, and stressful. I think 30 minutes is the maximum you should consider commuting and remember 30 minutes today might turn out to be 40 minutes 5 years from now. If you have to work in the city, live in the city; it’s better to sacrifice living space rather than move to the suburbs.

How To Invest Your Retirement Savings

What to do with your retirement savings:

Rule #4: Invest your savings in low cost stock and bond index funds:

As hard as it is to believe, you can have the same standard of living in retirement with only 50% of your pre retirement income. Your goal now is to save enough money to hit your target retirement balance before age 65.

In order to have the save 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!!

Let’s assume your family income is $150,000 a year, you want to save 6% of your yearly income in your retirement savings account and be completely debt free before age 65. How do you make your yearly savings grow to reach your retirement target?

The answer is low cost stock and bond index funds. According to William Bernstein, the easiest way to do this is to invest your savings in 3 simple products: (I have modified his advice for a Canadian audience)

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

Thankfully, companies likes Vanguard Canada, IShares Canada and BMO offer these low cost index funds. My personal favourite is Vanguard Canada because the company is owned by its customers so their incentive is to deliver best results to you, not to third party shareholders.
Using Vanguard products, and the example of a family earning $150,000 a year, you need to save $9000 each year (6% of $150,000). You will split that $9000 into 3 pieces of $3000 each and buy:

$3000 in Vanguard FTSE Canada All Cap Index ETF (VCN)
$3000 in Vanguard FTSE All-World ex Canada Index ETF (VXC)
$3000 in Vanguard Canadian Aggregate Bond Index ETF (VAB)

That’s it. A few minutes work, once per year and you are done.
To buy these funds, go to your bank, ask to set up a discount brokerage account, and make the purchases when you have the money. You could purchase $3000 VCN in March, $3000 VXC in August, and $3000 VAB in October. When you buy really doesn’t matter as long as you do it every year between ages 30 and 65.

As of February 2018, Vanguard has introduced a new one stop fund that includes both stocks and bonds and does the rebalancing for you.  I’ve posted about it on the blog already so check it out if you’re interested. I will be recommending this new product to all my friends and family.  VGRO, VBAL are the symbols.

Why You Feel So Poor In Your 30’s And 40’s

One day you’re a carefree college student and, suddenly you’re not. You wake up one morning to find that you are a homeowner, a spouse, a parent, and poor. Not really poor, but you feel like you can’t seem to pay the bills, pay off the mortgage and still have a bit of a life and save for retirement.

There’s a good reason for that. You are raising a family and that usually means a lot of large extra expenses that stick around for 20 or 30 years, longer if you feed them well.

Actuaries have looked at spending patterns of Canadians for decades and they find that Canadian families will spend roughly 30% of their income to pay the mortgage and raise the kids. This 30% number is pretty consistent regardless of whether your family earns $90,000, $150,000 or $200,000 a year; the more money you make, the more expensive home you buy and the more you spend on the children.

This 30% will typically last for about 30 years and then, Poof, it disappears, hopefully sometime in your early to mid fifties. If you still have debts in your late fifties, don’t panic; just make sure to keep saving your 6-10% per year for retirement and be sure to have all your debts paid off before you retire at age 65. Follow this strategy and your retirement will be comfortable and secure.

Ladies and gentlemen, this is the way it’s supposed to be. You will feel cash crunched when the kids are still living at home and you are paying off the mortgage. You will not have enough money to indulge in fancy holidays or fancy sports cars. Those things will have to wait until you are older.

Your friends who don’t seem to have these same cash constraints are just going deeper and deeper into debt. One day, they are going to have to deal with this; either they will have to keep working past 65, or dramatically scale back their lifestyle in retirement. Or, if they’re lucky, a big inheritance is waiting for them.

One thing I can tell you for near certain, many people who are living the high life are really quite worried about making ends meet. According to surveys I’ve read, 50% of working Americans are stressed out about money to the point that it is having a negative impact on their lives (sleep problems, increased alcohol consumption, arguments with spouse, etc).

All this stress despite the fact that the average Canadian adult is 4 times richer today than a Canadian adult was in 1940. We have never had it so good and that is part of the problem. We are much wealthier but we also have a lot more to spend money on. Add banks and credit card companies that are only too willing to lend and we have a recipe for problems.

I wish I had an easy answer for this, but it’s hard to resist the temptation and peer pressure that surrounds us. None of us are immune to it. The only advice I can offer is to stick to our plan of saving 6-10% of your income for retirement, working until age 65, and paying off all your debts before you retire. What you spend your money on is not important, if you stick to the plan.

Why You Don’t Need A Financial Advisor

A financial advisor provides you with advice on investments, taxes, and retirement spending.   My experience speaking to advisors and their customers has generally been positive.  Most customers believe they can trust their advisor to provide sound financial advice.

The problem with financial advisors is the price they charge for this advice.  In two words:  REALLY EXPENSIVE.

If you are buying a mutual fund with your advisor, you are paying an average of 2.3% annual fee on your money.  That’s incredibly expensive and can add up to hundreds of thousands of dollars over your working life.

Here’s an example from a previous blog entry:

So how do we get to the $250,000 figure? Here are the assumptions. Your family income is $90,000 year and you set aside 10% or $9000/year for retirement for 40 years.

You invest in low cost index funds like Vanguard’s VCN and you beat the high fee mutual funds by 1.6% per year, which according to The Economist magazine, is the amount that mutual funds have lagged the market in the USA over the past 20 years.

If you take the yearly $9000 contribution and suck out the 1.6% average loss you can expect by buying the average performing mutual fund, you end up with $250,157 less vs. buying the low cost index fund.

Clear enough I think, but it doesn’t answer the question “where does someone go for specific financial or tax advice or planning for future generations if you don’t have an advisor?”

My answer is to hire an accountant for a few hours for $1000 or so and he/she can answer all your questions without any conflict of interest concerns.  The accountant won’t profit from your decision to buy a certain mutual fund or ETF.  They get paid strictly for providing advice.

Still need more information, you can hire a tax or estate lawyer for a few hours.

The money you spend with these unbiased professionals will be a tiny fraction of how much you will have to pay a financial advisor.

Here’s a blog for an accountant that I follow. His blogs are very educational and he seems to know his stuff.  By the way, I have no relationship with this person and will not benefit in anyway if you chose to use his services.

Good luck!   

Be Grateful You Can’t Invest In Hedge Funds

Investing articles can be long and boring.  Why don’t I read the article for you and provide the important message for DIY investing success.

Here it is.

Larry Swedroe is an excellent commentator and expert on investing. He writes articles for He’s also a big believer in index fund investing. He recently published an article discussing how poorly hedge funds have performed over many years and how worker pension plans, governments and individuals who have invested with them have lost out on billions of dollars because they bought in to the idea that these pros could beat plain old index funds.

Here is a summary of the findings he uncovered:

Hedge fund net return rates lagged behind total pension fund returns in nearly three quarters of the 88 total fund years reviewed, costing the group of pension funds an estimated $8 billion in lost investment revenue.
The 11 pension funds paid 7.7 times more in fees to managers for their hedge fund investments than for a same-sized total fund portfolio.
Hedge funds failed to deliver significant benefits to any of the pension funds reviewed.

His conclusions on why large pension plans continue to use hedge funds:

“Can it be that hype, hope, marketing and perhaps some free tickets to sporting events and golf outings have triumphed over wisdom and experience? (Note: That’s a rhetorical question.)The saddest part is that, ultimately, it’s the taxpayers (in the form of higher taxes) and possibly even the plans’ beneficiaries (in the form of reduced benefits) who will suffer from poor decisions made by pension plan trustees”

You can read the whole article here:

SunLife Financial Says Canadians Spend 62% of Their Working Income In Retirement

Aside from the actuaries I’ve highlighted in this blog (Malcolm Hamilton and Fred Vettese – our All Stars actuaries), this is the first time I’ve read an actual money manager admit that Canadians do not need 70 or 80 or even 100% of their working income to live well in retirement. And by living well, I mean the same standard of living as when they were working and raising a family.

This should come as a relief to many young people who are unable to save huge amounts of money when they are working and still have some fun while the kids are young.

My research has convinced me the number is closer to 50%, but 62% is not that far off. I’ll attempt to explain why the Sun Life number may be higher than the 50% number given by our All Stars actuaries.

1. The Sun Life data on spending came from a survey administered to 2000 retirees. The data used by our All Stars comes from Statistics Canada. I have more confidence in the Stats Can data only because it involves tracking spending for millions of retirees over multiple years. The Sun Life data is a snapshot at one moment in time from a group of 2000 people who may and may not really remember how much money they are spending. Let’s face it, most people do not keep accurate records of their spending.

2. The Sun Life data doesn’t take into account that there is research that spending decreases even further once retirees enter the later years of retirement. So a 67 year old who is still healthy and travelling will probably spend more than a 84 year old who may face some health issues. If you consider the spending habits over the whole retirement, the 62% could easily drop to the 50% our professionals found.

In any case, the report further proves that saving 15% of of your working income in order to be able to have enough money to spend 80 to 100% of your working income in retirement is unnecessary.

The easiest thing to do is save 6% each and every month (or boost it up to 10% if you believe that future stock and bond market returns will be lower in the future). Invest it in low cost index funds, and go on with your life. When the time comes to retire at age 65, you’ll be in great shape financially.

An another positive note, the Sun Life survey also found that 90% of retirees are happy in retirement, which is a good thing. There’s no value being financially sound when you’re bored and cranky all the time.