I should’ve written this article on Sunday. Instead, my lizard brain decided to spend four hours watching football (and being disappointed by the Browns, yet again). Humans are natural procrastinators. We want to feel as good as possible all the time. That’s why we spend now and save later, eat now and diet later, binge-watch Netflix now and work-out later. It’s a vicious cycle.

The right dose of discipline and effort can help curb your procrastinating nature for a while, but our lizard brain is powerful and makes us fall back into bad habits. Savings plans get derailed, diets get cheated on, and, well, you never did go to the gym.

So what’s the solution? You can design a clever trap to fool your procrastinating lizard brain. Or better yet, use one that’s designed for you. It’s called automation, and it goes beyond simply paying yourself first.

Save More Tomorrow

One of the best ways to get employees to save for retirement is to automatically enroll them into the group savings plan instead of leaving it up to individuals to opt-in. Automatic savings plans are the most effective way to build up a nest egg. If you have to actively think about saving, odds are you won’t do it.

Putting away even a small amount every month is a great first step, but perhaps there’s more you can do to ensure a bright financial future.

Back in the mid-1990s, behavioural economists Shlomo Benartzi and Richard Thaler devised a program called Save More Tomorrow that used nudges to help people make better long-term financial decisions. The program invites employees to gradually increase their savings rate over time.

Save More Tomorrow turns our natural tendency to procrastinate into a positive outcome. While most people would cringe at the idea of saving an extra $100 today, they’re more likely to agree to save that much in January, when their raise kicks-in. The Save More Tomorrow program asks the question and then automatically commits you to that increased amount in the new year. You don’t have to think about it again.

By all accounts it has been wildly successful – boosting the savings rates of as many as 15 million Americans.

“The average saving rates for (Save More Tomorrow) program participants increased from 3.5 percent to 13.6 percent over the course of 40 months.”

Benartzi isn’t satisfied, though. He thinks digital tools such as apps, websites, emails, and text messages can help people save even more money. But it’s not enough to just use these nudges inside of workplace sponsored programs. The new “gig economy” consists of freelancers, part-time workers, independent contractors, and the self-employed. It’s estimated that more than 40 percent of workers are no longer salaried employees.

These people will be solely responsible for their own retirement and financial well-being, and Benartzi says if we don’t provide them with easy digital tools for savings, we could be looking at a generation of workers struggling to achieve financial security in retirement.

Digital Nudges

Apple Pay and Amazon’s one-click buying are examples of digital tools that have made it easier than ever to spend money. With tools like robo-savings apps, the goal is to make saving money just as easy.

One example of a digital nudge might be in the way a question is framed. When users were randomly assigned different versions of a question about how much to save, only 7 percent opted to save $150 per month, while nearly 30 percent decided to save $5 a day. The smaller, daily amount seems more achievable even though it gets you to the same result in the end.

Related: The Illusion of Wealth

Another example is to provide just in time feedback to your mobile device. Apps that track your investment performance and spending habits can have a huge impact on your behaviour. Users of a U.S.-based app called Personal Capital decreased their spending by 15.7 percent. Most of that decrease came from discretionary spending, with users spending less on categories like dining out.

Results from government surveys support this behaviour. The majority of consumers with access to their financial information on mobile phones check their balances before making large purchases, and of those who check, 50 percent decide not to buy an item because of the feedback.

Improving Financial Literacy

One major issue with teaching financial literacy in school is that students can’t apply the concepts they learn until many months or years later. One study found that, like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behaviour 20 months or more from the time of intervention.

Benartzi says the just-in-time financial information provided by a good app can solve this timing issue, providing people with crucial information when they need it the most.

Final Thoughts

I think about my finances more than the average person but that doesn’t mean I’m not susceptible to nudges. Just the other day I was checking my mortgage balance online when I saw a note that read, “increase your payment by $50 and you will save $2,469 in interest and pay off your mortgage 10 months sooner,” followed by a link to take action. So I did it. The new payment starts next month.

I’m confident that future me will be able to handle the higher payments next year and my discretionary budget will naturally adjust to its new reality.

In fact, whenever I set up my budget for the new year I look for other opportunities to save more tomorrow through the power of automation.

For the past two years, hundreds of you signed up to watch me and dozens of personal finance and investing experts speak at the Canadian Financial Summit. Well, we’re back again with a fresh new line-up of information designed to make you better savers, investors, and take control of your financial future.

Get your free ticket today to access this virtual financial summit, which takes place online from September 26-28, 2019. You’ll be able to watch an all-star panel of 25+ Canadian personal finance experts, including yours truly, offering sessions that include:

• Better, smarter, easier ways to invest
• What a safe withdrawal strategy looks like for retirement at any age
• Getting the most out of TFSAs, RRSPs, and RESPs
• How to prepare both your portfolio and lifestyle in the years before you retire
• How to check your “retirement readiness” <——- That’s mine!
• F.I.R.E. (Financial Independence/Retire Early
• Minimize costs, maximize bang for your renovation bucks
• Real estate investing made easy
• How to legally avoid Canadian taxation when you move for work or retirement
• How to use Financial Technology (FinTech) to save major cash
• How to most efficiently draw down your nest egg in retirement
• How to earn more money by creatively advertising innovative side gigs
• Avoiding crippling fees and terrible advice
• How to strategically pick the perfect wardrobe without breaking the bank
• Benefit from automatic insurance packages on your credit card
• Much, much more!

Sign up for free tickets to the 2019 Canadian Financial Summit right here and you’ll also be eligible for the early bird discount for lifetime access to every single session for just $87. The All Access Pass also includes exclusive access to seven expert sessions, plus other extras such as e-books, guides, and apps, that’ll make you a better saver and investor.

Why get an All Access Pass?

• “Those bonus videos alone are worth the price of a ticket.”
• “The eBooks and other free resources – combined with the any-time & anywhere convenience – was just too much to pass up. I’ll save hundreds of dollars with the bonus tax workbook alone!”
• “I just wanted to go back and re-watch certain talks again in more detail to make sure I didn’t miss anything.”

My session will be on September 27th and in it I explore everything you need to think about as you prepare for retirement. From putting together the puzzle of your retirement income sources, planning how you’re going to spend your time, and most critically, how much you plan to spend in retirement.

Just head on over to the Canadian Financial Summit, sign up for free, and be automatically entered to win one of the free Premium All Access Passes they will giving away when the event goes LIVE on September 25th.

This Week’s Recap:

Wow, this one was incredibly popular with readers: Using a robo-advisor in retirement – A Wealthsimple Case Study

Over on Rewards Cards Canada, here’s a look at the best Aeroplan credit cards in Canada.

In other news, I’ll be hosting an AMA (ask me anything) on Reddit (r/PersonalFinanceCanada) on Thursday September 26th. Stop by and ask a question or just hang out and read the thread as it unfolds in real time. I’ll also post the re-cap here afterwards.

In financial planning news, I’ve finished up the MoneyGaps free trial and hope to launch a discounted ‘light-advice’ service in the next few weeks. How does a $199 retirement readiness check-up and financial report card sound?

I think there’s a lot of potential with this service for those who aren’t ready for a full and comprehensive financial plan. Let me know what you think in the comments.

Weekend Reading:

Stephen Weyman of Credit Card Genius lists the best credit card offers, sign-up bonuses, and deals for September. Some great offers included this month!

She ditched Canada at 56 for Belize, where a couple can get ‘everything you can imagine’ for under $50,000 per year.

An older post from sketch guy Carl Richards, but still relevant and thought provoking today – Everything you need to know about personal finance from 11 simple sketches.

Ben Carlson is tired of people like Michael Burry knocking index funds so he wrote a piece debunking the silly ‘passive investing is a bubble’ myth.

Another take on the idea of a passive investing bubble, this one from John Stepek, editor of MoneyWeek:

“A bubble implies that there’s a mania for getting rich here. Instead, this just looks to me like an old-fashioned competitive price war. Investing is getting cheaper, and the folk who charge more don’t like it.”

Speaking of bubbles, though, how much will a year of university or college cost? Rob Carrick has put together a handy student calculator.

Dr. Daniel Crosby says the formula for happiness is simple: Wanting what you have.

Downtown Josh Brown and Michael Batnick play their favourite game – What are your thoughts? – on negative interest rates, IPO flops, market sentiment, and much more:

The Money Geek Graeme Hughes shares his thoughts on what’s wrong with Canada’s investment industry.

Michael James rips apart the argument that the government should eliminate mandatory minimum RRIF withdrawals.

Gen Y Money tackles multi level marketing from the angle of the anti-MLM friend (her). Interestingly, 83% of MLM sellers are women and a lot of MLM direct sellers start when they enter motherhood. They see it as a social outlet and a chance to contribute to their household finances.

Finally, selling a house in the United States (and I’d say in Canada as well) is extremely expensive. The Economist looks at why America’s real estate brokers are such a rip-off (note: you might need to register to read the full article).

Have a great weekend, everyone! And, remember to grab your free ticket to the Canadian Financial Summit here.

Readers often ask how an index investing approach can work for retirees or soon-to-be retirees. A low cost, globally diversified portfolio of ETFs is great for those in the accumulation stage, but retirees need income. How do they get it?

When asked this question I often point to this excellent piece in MoneySense written by Dan Bortolotti. It elegantly explains how to generate retirement income using a total return approach that allows you to maintain a portfolio of equity and bond ETFs.

Dan’s article does indeed show investors a better way to generate retirement income with ETFs. But the strategy can be complicated for a do-it-yourself investor to carry out in practice. Asset-allocation ETFs help simplify the process somewhat, but investors still need to manage multiple accounts, deal with mandatory RRIF withdrawals, and try to keep taxes to a minimum.

A Robo-Advisor Retirement Solution

Enter the robo-advisor. Once thought of as just an investment platform for Millennials, robo-advisors are well-positioned to take on the retirement income challenge. In fact, one of the fastest growing segments at Wealthsimple are retirees and those nearing retirement.

I spoke with Michael Allen, a Portfolio Manager at Wealthsimple, to get a real-life example of someone using a robo-advisor in retirement to manage their investments and withdrawals.

To start, Wealthsimple sets up the client with a globally diversified indexed portfolio that’s well-suited to their lifestyle needs and risk tolerance.

“Many people have the misconception that being in retirement means they need to change their strategy to focus on income producing assets. We don’t think this is true,” says Allen.

What matters is the total return of the portfolio relative to its risk. By relaxing the focus on yield, and using broad market index funds instead, a portfolio can be diversified across all sectors of the market instead of concentrating in companies that typically pay high dividends (e.g. financials, utilities, and consumer staples). This added diversification reduces risk without sacrificing expected return.

What’s more, increased tax efficiency is also a product of a total-return approach since capital gains — which are taxed at a lower rate than dividends or interest — account for more of the expected return over time.

With a total return approach, it is usually necessary to sell holdings periodically in order to generate funds for spending needs. In past times, when it was common to pay significant commissions to trade, this was a problem and a focus on income may have been warranted. Today, however, commissions are minimal for trades, including Wealthsimple where they are typically zero.

“Rather than pay out income, we automate monthly withdrawals. Each month we will sell units of funds to raise the required income need,” says Allen.

This is a form of rebalancing, as holdings that have drifted above their target weight are trimmed before assets that are under their weight. In a scenario where stocks were down significantly, income would be raised by selling bonds.

Related: How to transfer your RRSP to Wealthsimple

Let’s look at a hypothetical example of how this works with a holistic retirement strategy.

Wealthsimple Case Study: Retirement Withdrawals

Allison and Ted were long time clients of one of the bank owned brokerages. Both are 65 and recently retired. They were paying high fees for one phone call each year with their advisor.

They came to Wealthsimple for lower fees. But they also wanted high-quality advice from advisors with a fiduciary responsibility to look out for their best interests. And, the assurance of a consistent investment strategy over the coming decades. That way, if Ted had to one day assume the role of managing the household finances, a responsibility he doesn’t currently own, the transition would be less stressful.

Allison and Ted transferred TFSAs, RRIFs, and Joint accounts to Wealthsimple. Their goal is to fund retirement and leave an estate to their children. Spending needs are $80,000 per year. Their total portfolio is worth $1,700,000.

Understanding their existing accounts, annual spending needs and long term goals, the team at Wealthsimple was able to propose a retirement investment strategy curated specifically for them.

First, Wealthsimple created a financial plan to determine their ability to achieve their desired level of spending until age 95 and developed a tax efficient strategy for pulling funds from their various accounts.

Related: Which accounts to tap first in retirement?

A balanced and globally diversified portfolio was recommended, with 50% equity and 50% fixed income. Broad-based, low-cost ETFs were used to form the portfolio and fund selection was tailored to account type to minimize taxation.

It was also recommended that they defer CPP until 70 and begin drawing down on the RRIFs instead. Pulling on the registered funds earlier than necessary minimizes the risk of higher taxes in the future and potential OAS clawbacks as well.

“We suggested withdrawing $70,000 a year. Combined with Old Age Security benefits and modest withdrawals this satisfied their lifestyle needs and kept all income in the lowest tax bracket,” says Allen.

To produce consistent income, an automated monthly withdrawal of about $5,800 was set up from their RRIFs. Allison and Ted don’t have to worry about what to sell, as a rules-based rebalancing methodology automatically sold funds that were over-weight to generate funds for withdrawals. As a result, their portfolio consistently remained close to its target weight.

At the present time, Allison and Ted are projected to meet their spending needs, adjusted for inflation, and leave an estate of around $500,000 in today’s dollars for their beneficiaries.

Each year the plan is updated to incorporate any changes in Allison and Ted’s circumstances as goals, as well as how markets have performed relative to expectations. And at any point over the course of their retirement, Ted and Allison have access to our team of advisors should they have any thoughts, questions, or concerns about their portfolio and investment strategy.

Final thoughts

Retirees don’t need to chase high yield investments, or substitute dividend stocks for bonds, in order to build a sustainable retirement income stream. You can meet your spending needs using a total return approach with equity and bond ETFs (along with a cash / GIC bucket for short-term spending).

And while asset allocation ETFs have lessened the burden on investors who manage their own portfolio, a robo-advisor solution like the one outlined above can manage your retirement income withdrawals in a simple and tax-efficient manner.

Did you know Boomer & Echo readers get a $50 cash bonus when they open up a new Wealthsimple account and fund it with $500 within 45 days? Transfer your account to Wealthsimple and they will cover the transfer fee.

Readers: Who’s interested in using a robo-advisor in retirement? You can book an appointment to speak with a Wealthsimple portfolio manager today about your personal retirement scenario.