Weekend Reading: The Worried Wealthy Edition
I work with a lot of clients who have done everything right. They saved diligently throughout their careers, paid off their mortgage, maxed out their registered accounts, and arrived at retirement with more money than they ever expected to have. And yet they're worried.
Not about whether they can afford to retire – they clearly can – but about OAS clawbacks, sequence of returns risk, safe withdrawal rates, and whether their portfolio can survive a market crash in year one of retirement.
The irony is that the very habits that made them wealthy are now working against them, because the worried wealthy are almost always focused on the wrong things.
Take the savings rate problem. People who saved aggressively throughout their working years were, by definition, living on much less than they earned.
Old habits die hard, and while many clients imagine they'll flip a switch in retirement and suddenly spend 150% or 200% of what they spent while working, in reality they tend to keep spending roughly what they spent in their final working years.
My job isn't to rein them in – it's to nudge them toward enhancing their lifestyle with travel, hobbies, and entertainment, and to weave in periodic lump-sum expenses for vehicle replacements, home renovations, and financial support for kids and grandkids.
Then there's the OAS clawback anxiety, which I'd estimate affects the majority of my worried wealthy clients in their imaginations but only 8.3% of recipients in reality.
With pension income splitting and some basic planning in your 60s, most people can reduce or eliminate any clawback entirely.
As for sequence of returns risk: the 4% guideline exists to show the maximum you could safely withdraw from a portfolio over 30 years without running out of money.
But the worried wealthy aren't spending anywhere near that ceiling. They have cash wedges for their cash wedges, two TFSAs they'll never touch, and once CPP and OAS kick-in they're swimming in guaranteed income while their net worth continues to grow.
Which brings me to the TFSA problem. Many of my higher-net-worth clients are underutilizing their TFSAs – holding cash or conservative investments inside an account they'll likely never draw from and will continue contributing to for the rest of their lives.
That's backwards. If you're never going to touch your TFSA, you should be investing it like a 30-year-old would: higher equity allocation, long time horizon, maximum tax-free compounding.
The practical result is a rising equity glide path where your RRSP and non-registered accounts are invested more conservatively to support withdrawals, while your TFSA compounds aggressively in the background, completely sheltered from tax.
If you want to hear more on this topic, I'll be back on The Wealthy Barber podcast (recording this week, publishing TBA) to discuss exactly this – the worried wealthy, and why so many high-net-worth retirees are anxious about all the wrong things. Stay tuned for that one.
This Week's Recap:
In the last edition of Weekend Reading I explained (again) why dividends are not free money.
After I filed my tax return last month I remembered that both of our kids got braces last year and we could claim the costs as a medical expense. We filed again (reassessment) and got back an additional $2,100 in taxes!
Weekend Reading:
A Wealth of Common Sense blogger Ben Carlson reveals the four abilities every investor needs to be successful.
Ben also wrote a new book on risk and reward, and he went on The Long View podcast to discuss the book, what investors can learn from past bubbles, and the role of complacency in today’s market environment.
The New York Times interviewed personal finance author Ramit Sethi about what millennials need from their boomer parents:
“More sophisticated financial planners now know that if you have something to give, giving is much more impactful when your children are younger, particularly when they’re 35, 40, 45. Those are really tough financial times for people. But the best thing that older parents can do is to actually ask their children and legitimately learn what is going on financially because it is not the same.”
In this CBC Go Public feature, WestJet is accused of a tricky manoeuvre to deny dozens of passengers compensation after flight cancellations.
On The Wealthy Barber podcast Dave Chilton and Mark McGrath discuss all-in-one ETFs, rent vs. buy, and financial trade-offs:
Should you pay your tax instalment payments? Jason Heath explains why quarterly tax instalment payments are suggested payments, not balances owing.
This investor plans to rescue empty condos by buying them up and turning them into long-term rentals.
Finally, for Globe and Mail subscribers, why your retirement savings target is probably lower than you think.
Have a great long weekend, everyone!
“Then there’s the OAS clawback anxiety, which I’d estimate affects the majority of my worried wealthy clients in their imaginations but only 8.3% of recipients in reality.”
Well, if they are “wealthy” then by definition they are a subset of recipients and their personal reality/likelihood is quite a bit more than 8.3%. If they are “wealthy” ($5M for a couple? $10M? $20M?) then it has to be close to the probability of 1 regardless of income splitting. And if its 8.3% (aka median) then their sequence of return risk is very real.
Ok, I have no idea about the actual numbers among your clients but still curious how you define “wealthy”. Usual subconscious definition is “someone with a little more than me” but you have to be more specific to make this post clear.
I think TFSA is an awesome emergency pot. We try to aim for fairly consistent average taxation rate now and in retirement. And like you say, one may need to work to increase expenditure rate to make it happen. But what happens if you need to buy a new car or help a family member in emergency or get a really expensive health procedure abroad? That’s where TFSAs become instrumental. You can draw without forcing your tax rate for this year to skyrocket and replenish over time.