A Big Question – How Long Do I Think We’ll Live?

It’s kind of a morbid question to ask how long you plan for a retirement account to last for. Ideally, once I’m done working there will always be money in the bank, but realistically, I’d rather sort out a way that my wife and I are not over-saving now to have a massive “war chest” of money that we’re never going to touch.

Personally, I have used firecalc to assess my retirement plans, including withdrawal rates for spending, additional dollars being earned (through either my own pension fund, the Canadian Pension Plan, or potentially Old Age Security). I have found it a useful tool, as it has “told” me in several retirement setups that there’s a good chance my money will run out before I need it to.

I picked age 100 for my wife and I when I run these test calculations. I don’t know if in 60 years medical science will have obtained a significant breakthrough regarding age reversal or not*, but this seems to be a conservative age for early retirement planning, with the current average lifespan is much less than that at 81.24 years for Canadians. There are more and more people living past 100 these days compared to even a decade ago, due to enhancements in medical science. While I hope that I won’t be “inefficient” in my planning by working longer than I need to, it does seem prudent to save a bit of extra money just in case either my wife or I does make it past the average expectancy.

My hope is that with my dividend paying portfolio I will never have to touch the principal investments I have made and can essentially live off of some of the earnings, while re-investing the rest. To me, this is one of the benefits of investing in dividends (whether it’s the most efficient way overall to is in question) – hope for some capital return, and take the dividend money off the top. As long as the underlying security remains valuable, my hope is that we will never have to worry about running out of money in old age.

It is an important question to ask when setting up any sort of retirement portfolio, whether you’re planning on leaving the workforce in your 40s or you wait until your 80s – do you have enough money saved to maintain the lifestyle you want to have?

 

 

* I’m currently reading an interesting sci-fi book titled “The Postmortal” by Drew Magary that looks at the downside of humans finding a cure for aging. I would recommend it to anyone interested in the world of speculative fiction and likes this kind of story.

My Planned Portfolio

The last few weeks, I have written about a few of my holdings in my retirement portfolio – something which I hope will support my wife and I from the time we decide to stop working until we don’t need money anymore. Today, I’m going to lay out my current “end game” for when I am fully invested.

Over the course of reading many investing and personal finance books to come up with a plan that meets both my risk profile as well as providing the necessary cashflow that my wife and I require. There are so many points of view on what “proper” securities are, and what you should stay away from that making up a financial plan gets very confusing. Because retirement investment plans cover such a huge expanse of time (I’m hoping for another 60 years, which would get me to 95), the stuff I’m investing in today at age 35 may not make any sense to me by the time I turn 45.

The following represents the 3 main categories that will make up my portfolio.

80% – Income Producing Securities

These investments will made up of dividend producing stocks and Real Estate Investment Trusts. The purpose of this group of investments is to hopefully replace the income that my wife and I are each currently spending 40 hours every week working.

There are risks with having an equity allocation this high, it is contrary to at least 40% of investing and personal finance books I’ve read. I’m not sure who wrote it, but I prefer to follow the tenant that I’d rather have 20 or 30 sources of income (separate stocks I’ve invested in) than depending on one salary now. As long as I’m correct on the vast majority of my investments in this category, I think my wife and I will be okay being dependent on these investments.

15% – Bond Funds

The purpose of the bond funds are to stabilize the retirement portfolio. The stable bond yields will decrease the overall portfolio yield, they are “safer” investments due to the more stable and predictable nature of bond yields.

One thing that I hadn’t thought about, but Nelson from Financial Uproar wrote about was the benefit of having bonds available to sell in down markets in order to buy more stocks. He writes that because in a down market, bonds generally increase in value, they are a good source of cash when there are buying opportunities.

5% – Value Stocks / Speculation

This percentage of my portfolio may increase as I get more comfortable with investing. I am mostly too impatient with investing in stocks that would be deemed “value” stocks, mainly because the return on these types of investments requires the rest of the stock-buying public to be involved with the stock. I think there is merit in having these kind of investments, and that they could result in significant capital gains if done correctly, but I’m not willing to invest huge amounts of money in this category at this time.

So, that’s a proposes bird’s eye view of how I’m currently investing in securities. What does your plan look like, and how did you decide on it?

Boxed In?

My wife and I decided 6 years ago that we wanted to be financially independent from our jobs by the time I was 45 (she will be 42 at the time, but doesn’t think it would be fair if I had the opportunity to retire and she didn’t, so we settled on a co-retirement). 45 is an arbitrary date, and we may end up changing our end goal, depending on how our finances are looking at the time, or if there are any changes to our current goals.

Working towards a concrete goal with a date in mind is helpful to me because it gives incentive to follow the plan I have set out in order to meet the set goals. I’m a procrastinator by nature, and not having any financial goal would lead to leakages, and an eventual “collapse” in the entire plan, along with probably a lot of inefficient spending made by my entire household.

On the other side of having this kind of plan, my wife and I have so far dedicated ourselves to a pretty aggressive route to retirement. On a day to day basis, most of the financial stuff takes care of itself – we don’t spend very much and therefore passively accumulate quite a bit of money naturally. Where our plan has kind of “boxed” us in a bit is that we require a fairly significant amount of money coming into our investment accounts on a regular basis in order to fund our financial plan.

I worry sometimes that we’ve limited some of the flexibility we may have in our working life by going down the Early Retirement path we’re on. Realistically, we don’t really require very much money to live on. We have no debt and could maybe right now add some flexibility to our lives. For example, instead of working 40 hours right now, we could reduce our hours to a percentage of that at jobs that pay less, but may allow for a different or more rewarding experience on a day to day basis.

Our main tactic to ensure that we aren’t “stuck” with a decision we made a number of years ago is communication and flexibility. If my wife or I decided tomorrow that we wanted to go for a job that paid half as much as she’s making now, we would have a discussion over the impact to our future plans and work it out – this kind of long-term plan requires buy-in from both my wife and I, and if either of us were unhappy with what we’re doing for most of our waking hours, the whole thing won’t work.

Portfolio Teardown – Stock #3

To see Part 1, where you can read about my adventure in hedging against a non-existent oil price spike.

To see Part 2, where I write about holding onto a stock because it’s worth less than the transaction cost.

Investment #3 – XIN.TO ETF – ISHARES MSCI EAFE INDEX ETF (CAD-HEDGED)

Current Percentage of Portfolio: This investment makes up 3.7% of my portfolio

Reason for the Investment: As anyone who may be keeping up with my project of self-evaluation of my investments, you may note that in some cases I may not have had an amazing plan behind some of the things I put money into. This keeps with the general trend of not really having a good hypothesis for purchasing the security.

I’m hoping that my new long-term strategy, which will at least have some level of reasoning behind future investments besides the “I read a thing written by one guy that made lots of sense so I’ll throw some money at it” plan that I had ten years ago.

Out of the three securities I’ve written about, this one at least has a positive return – providing a return of 19.2% over the approximately 8 years that I’ve held onto it.

This investment wasn’t exactly a mistake, but I’m sure there would have been a better place to put my money, or at least something that I understood a little better. The MSCI EAFE index is made up of “large and mid-cap equities across developed markets in Europe, Australasia and the Far East, excluding the U.S. and Canada” and does provide some geographic diversity to my almost exclusively North American centric portfolio. What it doesn’t provide is the cashflow that I’m looking for from a security.

Current action: I’m going to sell it to add to the small amount of money I’ve accumulated to buy something that aligns with my retirement fund plans, which I will outline in more depth next week.

Portfolio Teardown – Part 2

As I wrote about previously, over the next few weeks, I’m going to align these “old” investments to fit my current financial goals. of creating a cashflow large enough to fund my wife’s and my lifestyle. I’m starting with small holdings and working large. The stock I’m going to write about this week is probably one of my first purchases, and as you’ll see has not done very well at all.

Stock # 2 – Goliath Film and Media Holdings (GFMH)

Current Percentage of Portfolio: This investment makes up a miniscule portion of my portfolio, at 0% (You’ll see why in the explanation below).

Reason for the Investment: I bought this stock as part of the “Little Book that Beats the Market” experiment investment phase that I went through almost 10 years ago. At the time, I didn’t have much money to invest, and only put a total of $50 into this stock (eight whole shares!), along with probably another dozen stocks. The idea of the writer of the book is that you’d buy stocks monthly (2 or 3) based on his “magic formula”, hold them for only a year and sell these same stocks. The intention of the exercise was to find value stocks and that several of the securities purchased over the year would work out significantly well.

At the time, this strategy was as good as any for me, and I had the benefit of 40+ years of an investment window to make mistakes, with the upside touted as a 17-year annualized return of over 30.8%. 30.8% sounded terrific to me, and I figured I would be a millionaire in 5 years. Unfortunately, the problem with any value investing model is that at some point, you have to “eat” your losses. Carrying out a value investing strategy as a poorer debt-ridden 20-something, I lost interest in this method after the market tanked significantly over a period of months.

Current action: I’ve held this particular company in my portfolio because it is worth a grand total of $0.03. It would cost me more in commissions to sell it than it’s worth, so it will probably stay in my portfolio forever – reminding me of the time I bought a stock that decreased in value by 99.9% in less than a year.

Basic Universal Income

I love science fiction stories, and read probably fifteen or twenty of these kind of novels per year. Some of stories told in the books are similar, but most paint an amazing picture of the future – interstellar spaceships, extended life treatments, peaceful worlds and exotic alien lifeforms. Reading these books is  a form of escapism – the worlds painted by the authors get me thinking about what the future could be like.

I keep an eye on current technology trends happening in the world, which, compared to previous human history is somewhat alarming.  There are protests taking place all over the world around the legalities of Uber driving services. Technology has allowed individuals (whether illegally or not) to provide a service that taxis have carried out as long as cities existed. The next step to this technology is to remove human drivers altogether – have self-driving cars dispatched to people who “hail” them via their phone and cut costs and increase convenience further.  Transport truck companies are testing self-driving trucks to run on the highways – jobs which have existed forever could possibly be gone in the next decade.

More and more automation is happening in the workforce, whether it’s robots in factories or new self-serve systems at McDonald’s restaurants. In previous eras, there were always protests around the negative impacts of technologies on employees. There may be an evolution of jobs similar to the past, moving more towards service industries or other “value-added” trades, but there is the possibility of a significant volume of people’s positions just disappearing in our near future sci-fi world.

Couple the significant erosion of traditional middle-class work with the vast income inequality currently being experienced all over the world, where the top 1% of households will own more than the 99% by 2016 and there’s going to be some significant financial problems when it comes to people’s personal finances in the future.

One possible solution to the coming world where most manufacturing, transportation, as well as healthcare and financial services jobs will probably be mostly automated is a Universal Basic Income. Universal Basic Income is what it sounds like – a cheque comes to everyone which ensures nobody lives in poverty. According to this article, it is an idea that is picking up steam world-wide, and is popular among both Liberal and Conservative parties as a solution to poverty. In a world where jobs may slowly be disappearing, never to be replaced, this type of wealth-split may provide a solution.

In its essence, Universal Basic Income is what I’m shooting for in order to fund my Early Retirement in a decade. I want to be financially independent of a job, and need a certain amount of money to do this. Currently Switzerland is campaigning to implement this idea, providing all citizens with approximately $35,000 per year CAD, for which a referendum will possibly be held in the next year or so. $35,000 would easily allow my wife and I to maintain our current lifestyle and probably leave the workforce.  With the possibility of a steadily decreasing pool of jobs available, it may be one solution for most people.

I think the next couple of decades should be very interesting. I’m hoping there are no significant changes in my ability to find work, but in the event of an “employment recession” caused by an infusion of automation in all forms of work, I am very curious to see what the policy response from both citizens and governments will be.

Portfolio Teardown – Stock #1

I am kind of a messy person by nature. I try my hardest not to be messy, but it’s just easier to be lazy and not pick up after myself than it is to take the extra few minutes to (for example) take those dirty socks out of the back of my hatchback where I’ve left them after golfing and put them in the dirty laundry hamper where it belongs (I may or may not have a decent pile of dirty socks hanging out in the back of my car). I’m getting better at not being messy, but some things slip through the cracks that cause a little bit of stress when people are coming over.

My RRSP portfolio is part of the mess that exists in my life. My investments can be split into two distinct timeframes – the period of time before my wife and I were married (over 6 years ago), and the current period, which is from last fall until now when our house was paid off and we started investing. My “old” investments are my financial mess, and don’t really line up with my current financial goals. Most of the securities aren’t bad investments, if fact, most of the investments I made over 6 years ago have done well.

Over the next few weeks, I’m going to align these “old” investments to fit my current (and hopefully future goals). This exercise will tidy up these old investments, while at the same time let me organize my portfolio.

Stock # 1 – PowerShares DB Oil Fund

Current Percentage of Portfolio: This investment makes up a very small portion of my portfolio, at 1.17%

Reason for the Investment: I bought this security as a method of hedging against steadily climbing fuel prices in the spring of 2008. This seemed like a really good idea – figure out how much my fuel costs would be in a year, and buy a stock that closely followed the gas market, in order to profit from rising fuel costs to balance off the rising costs.

Of course, almost immediately after I purchased this security, there was a significant dip in the oil market, and the panic buying of this particular security leveled out, causing it to drop significantly. Since purchase, this stock (as of today) has dropped almost 70%.

Instead of using the sale of this asset to do something useful, I’ve held onto this stock, hoping it would rebound, which I don’t believe will ever happen,

Current action: Sell, and buy something with either better potential for an increase in value or something that will provide steady income to me going into the future.

I really wish this purchase was up 100% after not doing anything to it for 7+ years, but that’s just not the case. I’m going to chalk this up to a “learning opportunity” and move on.