Weekend Reading: Your Numbers Tell A Story Edition

By Robb Engen | June 8, 2024 |

Weekend Reading: Your Numbers Tell A Story Edition

When I first create a financial plan for a client I tell them that this is my initial interpretation of their current situation and future goals mapped out over time. It’s a projection or road map based on their current trajectory.

I’m looking for clues, patterns, red flags, and opportunities. The numbers are telling a story about what’s possible.

Here’s what I mean.

A typical net worth projection during your working years goes up and to the right. That makes sense, as you earn income, contribute to your savings, get a rate of return on your investments, and pay down debt.

But working families also have competing financial priorities. Income interruption from parental leave, child care, vehicle payments, home renovations, even upsizing a home are all real possibilities that young families are dealing with.

typical net worth projection

Your house is your largest asset and you’re deep in mortgage debt. You have little in the way of savings and feel like you’re not making any progress while you’re dealing with one-time, temporary costs. But zooming out you can see a light at the end of the tunnel. 

Child care costs subside, income increases, and mortgage payments no longer feel like they’re taking up all of your disposable income. You start making some meaningful progress on your retirement savings goals and your net worth heads up and to the right. 

Once the mortgage is paid off, you have options to ramp up savings and even ponder early retirement.

At this point I’m looking for clues as to whether you’re on the right track to retire early, or if you’d need to downsize your home to ensure you can maintain your lifestyle throughout retirement, or if you can afford to delay taking CPP and OAS to secure more lifetime income.

I recently wrote about a concept called your home equity release strategy and it’s becoming more and more important to think about, especially in high cost of living areas where retirees may be sitting on untapped home equity of $1M to $2M (or more).

downsize in retirement

In the above example, the retired couple downsize their home at or shortly after retirement to eliminate their mortgage, add precious home equity back into their savings, and ensure they can maintain their lifestyle throughout retirement.

There is still a slight danger of running out of money in their old age, but they do have the paid off home equity in their downsized home to fall back on, just in case.

Another option is to sell the family home and rent throughout retirement. This has the added benefit of being able to maximize retirement spending, but with the trade-off of not having a fall back option to sell the home in case of unplanned spending shocks or poor market returns. A prudent spending plan is paramount in this case.

rent in retirement

What about singles? In my experience, singles can have a difficult time in two phases of life.

One, buying a house as a single in a high cost of living area may be incredibly challenging. 

Two, without the benefit of a partner with whom to split income in retirement, singles face higher tax rates and are more likely to incur Old Age Security clawbacks.

single, can i buy a house

In the above scenario, this single individual was fortunate to receive a small inheritance in her late-40s to finally be able to afford a condo in her desired location and price range.

If she keeps her spending consistent with the lifestyle she enjoyed in her final working years then it’s possible that she won’t have to sell that condo to fund her long-term retirement spending. But, in many cases, singles who buy a home are more likely to have to downsize or sell their home to maintain their lifestyle.

Finally, several of my clients are interested in the “die with zero” approach to retirement planning. I don’t love it, because spending every dollar and having your last cheque bounce leaves no margin of safety for unplanned spending shocks. 

So, for homeowners looking to maximize spending, I prefer to show them a “die with zero, but stay in your house” scenario. This way, you have a fall back option to sell your home and move into a retirement facility if necessary as you run out of money.

Die with zero, stay in house

Your numbers tell a story about what’s possible. Projected over time, we can start to see patterns, red flags, and opportunities in your financial plan. We’re looking for clues to see if you’re on the right track or need to change course.

I’ll be honest, more often than not these net worth projections show that my clients can spend more than what their current budget suggests. 

But, often we do see red flags that suggest clients will need to make difficult choices about working longer, downsizing or selling the home, or reducing spending to ensure they won’t run out of money.

Want to know what kind of story your numbers tell? Reach out to me and we’ll come up with a financial plan.

This Week’s Recap:

Have you considered your home equity release strategy?

How much do you plan to spend in retirement?

Here’s how I plan to catch-up on my TFSA room.

Promo of the Week:

We activated player two for our rewards cards strategy, meaning earlier this year I signed up for the American Express Business Gold card, hit the minimum spend target to reach the welcome bonus, and then referred my wife (player two) to get the same card in her name. 

The result is 15,000 additional Membership Rewards points for me for the referral, and now my wife has a chance to earn 75,000 Membership Rewards points after spending $5,000 in the first three months.

We activated player two for our rewards cards strategy, meaning earlier this year I signed up for the American Express Business Gold card, hit the minimum spend target to reach the welcome bonus, and then referred my wife (player two) to get the same card in her name. 

The result is 15,000 additional Membership Rewards points for me for the referral, and now my wife has a chance to earn 75,000 Membership Rewards points after spending $5,000 in the first three months.

Weekend Reading:

Should I pay myself dividends from my company to avoid CPP premiums

Many Canadians own foreign property. Whether its stocks, ETFs, bonds, real estate, or even crypto, you may have some tax obligations to consider.

Private credit funds are pitched as safe and stable, but investors aren’t getting anything special for the high risk and fees.

Is $1 million in savings enough to retire on if we withdraw 4% per year?

A fantastic conversation with the Canadian Couch Potato Dan Bortolotti on the Rational Reminder podcast last week:

A Wealth of Common Sense blogger Ben Carlson asks how would you invest $14 million?

RRSP to RRIF, and LIRA to LIF: Here’s how it all gets done.

How Wealthsimple is trying to beat the big banks at their own mortgage game:

“I’ve seen mortgage cashback gimmicks in the past, but this one is more interesting. Unlike other lenders’ rebate offers, Wealthsimple’s calculator makes it easy to estimate the savings — and they have compelling savings options.”

Here’s why variable rate mortgages are the best bet to save you money after Bank of Canada cut.

Dr. Preet Banerjee explains why AI outperforms humans in financial analysis, but its true value lies in improving investor behaviour.

Andrew Hallam shares the surprising truth: children likely increase your wealth.

Anita Bruinsma explains why divorcing parents are facing tough choices amid sky-high real estate prices.

The one place in airports people actually want to be: Inside the competition to lure affluent travelers with luxurious lounges.

Finally, Nick Maggiulli looks at when maximizing credit card rewards is worth it and when it is not.

Have a great weekend, everyone!

What’s Your Home Equity Release Strategy?

By Robb Engen | May 25, 2024 |

What Is Your Home Equity Release Strategy

The majority of retirees want to remain in their homes and age in place as long as possible. Indeed, most of the financial plans for my retired clients project them to stay in their home, or a home of equivalent value, for their entire lives.

That makes perfect sense if you plan on leaving your paid-off home to your beneficiaries upon your death.

But, for many retirees, a fully paid-off home represents untapped equity that will lead to underspending throughout retirement, or at least a serious reduction in standard of living as they age.

The solution is to consider a home equity release strategy – a term I first heard last month when Dr. Preet Banerjee wrote about biases around house rich, cash poor homeowners.

Below are the seven different home equity release schemes that were listed:

  • Reverse mortgages
  • Home Equity Lines of Credit (HELOCs)
  • Second mortgages
  • Refinancing
  • Selling to downsize into a smaller owned home
  • Selling to move into a rental home
  • Selling to lease-back the same home

Unlocking all or a portion of your home equity can significantly improve your retirement outcome, and yet many retirees are not even considering their own home equity release strategy as part of their retirement plan.

Below I’m going to share an example of a recent retired couple, Joe and Linda Davola, who live in Ontario and retired at the end of last year at ages 63 and 60, respectively.

They have combined assets of $1.4M saved across their RRSPs, TFSAs, non-registered savings, and Joe’s LIRA. They also have a paid-off home worth $1.1M for a total net worth of $2.5M.

Joe & Linda Devola Net Worth

Joe and Linda would like to spend $100,000 per year after-taxes throughout retirement. They work with an advice-only financial planner to see what’s possible.

The planner runs a projection that shows after-tax spending of $100,000 per year, rising with inflation at 2.1% annually until Joe’s age 75 year, and then increasing by just 1.1% annually until Joe’s age 95 year. 

In this scenario, Joe and Linda remain in their paid-off home and don’t touch the equity. Unfortunately, they run out of money in Joe’s age 91 year. 

Net Worth, no downsize, no one-time costs

In addition to this less than ideal outcome, the planner also points out that life doesn’t always move in a straight line. In fact, they will most certainly incur one-time costs such as home renovations, vehicle replacement, bucket list travel, or financial gifts to their children or grandchildren throughout retirement.

The planner meets with Joe and Linda and together they come up with a list of these one-time expenses that will or may occur over the next 5-10 years.

  • Bucket list trip to New Zealand in 2025 – $20,000
  • Kitchen renovation in 2026 – $40,000
  • Finance a new vehicle from 2027 to 2030 – $12,000 per year
  • Upgrade HVAC in 2031 and 2032 – $7,500 per year

When we add the one-time expenses into the plan, and keep spending constant at $100,000 per year, the outcome gets significantly worse. Now the Davolas run out of money at ages 83 and 80, respectively. That’s eight years earlier than expected.

net worth, no downsize with one-time costs

At this point it becomes crystal clear that in order to maintain their desired standard of living the Davolas will need a home equity release strategy.

They debate selling the house and renting, but Linda likes the peace of mind that comes with home ownership and worries about rising rental costs and the threat of having to move again.

Home Equity Release Strategy

The Davolas decide the best course of action would be to downsize to a condo in 12 years (Joe’s age 75 year). They’d sell their home for $1.4M and buy a condo for $900,000* – unlocking half a million dollars in home equity that can be used to maintain their standard of living.

*That $900,000 condo purchased in 12 years is the equivalent of purchasing a $700,000 condo today.

Their planner runs the numbers and suggests that not only can they continue spending $100,000 until age 95, but they can also give an early inheritance of $50,000 each to their two children from the proceeds of their house sale.

Here’s what it looks like:

net worth with downsizing and gift to kids

By “releasing” $500,000 of untapped home equity, the Davolas can fill up their TFSAs and give an early inheritance gift to their children.

They can maintain their desired lifestyle until age 95, and still leave an estate to their two children worth $1.73M. That’s in future dollars, mind you, so it would be like leaving an estate worth $835,000 today – or the condo plus $135,000 in savings.

Final thoughts

The desire to remain in your home as long as humanly possible and avoid long-term care makes perfect sense. But life doesn’t always turn out as planned, and it’s wise to avoid making decisions when our options and mental capacity may be limited. 

That’s why it’s smart to consider your home equity release strategy upfront at the beginning of retirement.

Can you honestly see yourself remaining in your family home into your 80s and 90s? 

We also tend to drastically overestimate our ability to endure significant spending cuts. I hear all the time from retirees who think they’ll just cut $20,000 per year or more from their spending at 75 or 80. 

In reality, the decline in spending from the “go-go” years to “slow-go” years to “no-go” years is much more subtle. Like, instead of spending continuing to rise with inflation it rises by inflation minus 1% in your slow-go years, and then simply remains flat in your no-go years.

So, instead of relying on a drastic reduction in lifestyle spending (poor future you!), consider how using all or a portion of your home equity can fit into your retirement plan and allow you to maintain the standard of living that you’d like to enjoy.

And, for my lifelong renters, it’s true that you won’t have the margin of safety and options that home owners have in retirement, but I’d also argue that if you’ve prudently saved and invested the (often significant) difference between renting and home ownership, you’re already on track to maximize your spending throughout retirement without leaving any untapped home equity on the table.

Weekend Reading: Retirement Spending Edition

By Robb Engen | May 18, 2024 |

Weekend Reading: Retirement Spending Edition

You might not have a hot clue how much you plan to spend in retirement, especially if those days are still a decade or further away. Even those nearing retirement may not have a good sense of their desired retirement spending amount.

A good rule of thumb is that you’ll likely want to enjoy the same standard of living you enjoyed in your final working years, if not enhance it with extra money for travel, hobbies, helping your kids, and spoiling your grandkids (if possible).

When preparing retirement plans for clients I’ll look closely at their current spending, and then stress-test the heck out of their plan to determine their maximum annual spending (the most they can sustainably spend without running out of money by age 95).

This offers clients a spending range between a comfortable floor (what they’re spending today), and a safe ceiling (their maximum sustainable spending limit). For example, let’s assume you spend $84,000 after-taxes in your final working years. A thorough stress-test of your plan suggests you can spend up to $96,000 per year without running out of money by age 95. 

Knowing this, clients have the option to dial up spending in good times or to dial it back in bad times. Reality probably means settling into the sweet spot of spending $90,000 per year.

Retirement spending of $84,000 likely gives you the ability to continue making TFSA contributions into retirement – socking away money for large known one-time expenses, unplanned future spending shocks, or to build up tax free savings for your estate. The trade-off is sacrificing some standard of living and not spending up to capacity.

Spending up to the $96,000 ceiling offers the ability to maximize life enjoyment, particularly in the “go-go” years of early retirement. The trade-off is no room for extra savings contributions to the TFSA for a rainy day, and potentially less margin of safety for unplanned spending, poor market returns, or longer than normal life expectancy.

One area of spending not talked about enough is your one-time cost categories like buying new vehicles, renovating or repairing your home, gifting money to your children, or taking a bucket list trip. These expenses are often large, are not factored into your annual spending needs, and tend to occur in the early years of retirement, squarely in what I call the retirement risk zone (the period of time between retirement and when pensions and government benefits kick-in).

Throw a bad stock market outcome into the mix, and this could be a recipe for disaster if not planned for appropriately.

All the more reason why retirement planning should be done 5-10 years before your retirement date. This gives you a chance to understand your retirement spending needs, list and prioritize your one-time expense categories, and hopefully knock some of those items off while you’re still working and earning income.

This also gives you a chance to consider working part-time as a way to combat the retirement risk zone and ease yourself into full-stop retirement living.

This Week’s Recap:

No posts from me in a while as much of our free time has been sucked up by kids’ activities (dance season) and birthdays. 

From the archives: Forget about asset location – why you should hold the same asset mix across all accounts

One final note on our mortgage renewal with Pine Mortgage. Everything is in place now and we’ve received the $3,000 cash back promotion along with a reimbursement for the home appraisal that they ordered. The dashboard is nice and user friendly, and they allow payments from our regular TD chequing account. 

Speaking of TD, they reimbursed us for the mortgage payment that automatically came out of our chequing account on May 1st. 

Finally, it looks like Pine Mortgage will get more attention now that they’re been chosen as Wealthsimple’s mortgage partner. That’s right, Wealthsimple is now offering mortgages (through Pine) and has some great deals for Wealthsimple customers (existing and new).

Promo of the Week:

Want to earn some serious credit card rewards? Start with the Amex Cobalt card – the best card for everyday spending in Canada with 5x points for food & drink. Sign up and spend $750 per month on this card to get an extra 15,000 Membership Rewards points (plus the 45,000 points you’d earn if you spend $750 per month on a 5x spending category).

Then use your own referral link to refer your spouse or partner (called: activating Player 2), and have them do the same thing. This could be worth a total of 120,000 Membership Rewards points in a year, plus another 10,000 for the referral bonus.

Next, use this link to sign up for your own American Express Business Gold card and earn 75,000 Membership rewards points when you spend $5,000 within three months. Then activate your player two for a chance to earn another 90,000 points (15k referral plus 75k welcome bonus).

If you’re looking for hotel rewards, this one is an absolute no-brainer card to have in your wallet. The Marriott Bonvoy Card gives you 55,000 bonus (Bonvoy) points when you spend $3,000 within the first three months. Not only that, you get an annual free night certificate to stay at a Marriott hotel (easily worth $300+), making this a card a keeper from year-to-year. The annual fee is just $120.

Weekend Reading:

A question I’m hearing more and more from clients and readers alike: Is it wise to begin investing when stocks are at an all-time high?

A Wealth of Common Sense blogger Ben Carlson on the gambler’s fallacy in the stock market.

David Aston explains why, when it comes to Canadian government pensions (CPP and OAS), timing is everything.

Jason Heath shares why your retirement may be different than you expected:

“Retirement math, whether based on rules of thumb or professional planning, can overlook some of the real-life implications of being a retiree. Running out of money is a risk, but so is running out of time.”

You want to retire early. Should you start your RRIF withdrawals sooner or later?

Trading meme stocks is gambling, not investing. But, have you ever gambled with meme stocks? Preet Banerjee walks us through the latest drama with GameStop stock:

Work can maintain engagement, keep us all sharp, as well as continue social connections and even a sense of purpose. Here’s why we should douse the FIRE movement and adopt CHILL instead.

A good piece by Dana Ferris on how to determine the appropriate retirement date. I recently wrote something similar about the best time of year to retire.

Long-time renter and blogger at Of Dollars and Data Nick Maggiulli writes about the rise of the forever renter class:

“This is where many in the unwilling Forever Renter class find themselves. They have good jobs. They make good money. But interest rates are also the highest they have been in two decades. As a result, if they want to borrow money to buy a house, they will pay for it dearly.”

PWL Capital’s Ben Felix explains why there’s room for good financial planning – and for error – before the June 25 capital-gains tax change (G&M subscribers).

Ben and his Money Scope podcast co-host Mark Soth teamed up to explain what the proposed capital gains changes mean for business owners.

Jamie Golombek says be careful moving your TFSA — or the CRA might come knocking. That’s because you need to let the financial institutions handle the transfer rather than withdrawing money from one TFSA and depositing it into another.

A really important article by Anita Bruinsma on what kind of money messages you’re sending your kids.

Used cars versus new cars: which market is offering better deals, and how has the landscape changed after the pandemic-era disruptions to supply?

Travel and credit card expert Barry Choi says there’s a loyalty arms race on, but not being loyal might be a consumer’s best move.

Finally, speaking of credit cards and loyalty programs, here’s a deep dive into the anatomy of a credit card rewards program. Interesting stuff!

Have a great weekend, everyone!

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