Weekend Reading: Financial Anxiety Edition

I work with a lot of young families who are trying to juggle the enormous pressures of paying off debt, saving for a house down payment, possible income disruption from taking a parental leave, moving, or changing careers, plus dealing with temporary but costly expenses like childcare, paying off a vehicle, or renovating a home.

Many are struggling to save and invest for the future because they’re just trying to stay afloat.

They’re also freaked out by ridiculous headlines showing they’ll need to save something crazy like $1.7M in order to retire comfortably.

On the flip side, many retirees have more than enough savings to meet their spending needs over their lifetime.

But instead of enjoying their retirement, they’re constantly on edge about the economy, the stock market, and inflation (among other things outside of their control).

To them, a comfortable retirement isn’t just about a number (and many of them do indeed have savings of $1.7M or more). The problem is their money psychology.

Imagine you spent your entire career dealing with financial anxiety – to the point where you developed a scarcity mindset and were always in savings mode.

How difficult do you think it would be to suddenly turn off the savings taps and turn on the spending taps in retirement?

The answer: Extremely difficult!

Think about it. If you’ve never exercised your spending muscles and just lived on, say, $50,000 throughout your entire 40-year career (while saving 20-40% of your income each year), how the heck are you going to go from spending $50,000 per year to spending $80,000 or $100,000 per year in retirement? It’s not going to happen.

In fact, I swear I spend more time trying to convince my retired clients to spend their money than I do working with them on optimal withdrawal strategies, tax planning, or their investment plan.

I don’t want you to have that type of relationship with money.

First, let’s acknowledge that it’s okay to save less in your 20s and 30s while you juggle competing financial priorities. In many cases, it’s impossible to consistently save 10% of your income for many years.

Related: The Rule of 30 approach to saving money

Adopting a staggered approach, where you might save 0% for a few years before ratcheting up your savings to 5%, then 10%, and finally 20% as your income grows and temporary expenses subside, allows you to do what economists call consumption smoothing – the idea that you maintain a relatively consistent lifestyle instead of depriving yourself during certain periods of high expenses, or instead of spending lavishly later in your career as those expenses ease and your income grows.

This aligns with what most of my retired clients say – that they want to maintain their current standard of living, if not enhance it slightly with extra spending on travel and hobbies for as long as possible.

Proper financial planning at appropriate times in your life can allow you to adjust course as needed to get your savings on track.

Finally, we tend to vastly underestimate how much we’ll receive from government programs like CPP and OAS. In many cases, these benefits can total up to $20,000 per year or more for individuals, and up to $40,000 per year or more for couples.

That helps take the pressure off having to save something ridiculous like $1.7M for retirement.

This Week’s Recap:

Last week I wrote about making the best of the bad mortgage options out there today. We chose a 1-year fixed rate and look forward to renegotiating next spring. 

Thanks to Rob Carrick for highlighting my article on how to choose the right asset allocation ETF in his latest Carrick on Money newsletter.

Now that we have our finances more or less figured out for this year and beyond, I took some time this week to look at our saving and spending plan for the remainder of 2023 and into 2024 (yes, I have a spending plan in place for 2024).

Then I did what I find a lot of small business owners are reluctant to do. I gave us a raise. 

My wife and I pay ourselves dividends in equal amounts to keep our taxes low and to simplify our finances. But we moved into a new house and took on a larger mortgage (at almost triple our previous interest rate). We made a promise to ourselves that we would still be able to live the life we enjoyed before buying this house, which meant continuing to spend money on travel, and still meet some personal savings goals like funding the kids’ RESPs and contributing to our TFSAs.

What that meant was our previous plan to pay ourselves $7,000/month in dividends wouldn’t cut it, so we bumped that up to $7,500 per month. Interestingly, that’s about a 7.1% increase from last year which would be somewhat inline with a proper inflation-adjustment (CPP recipients received a 6.5% increase in their benefits in January).

I think it’s important for business owners to pay themselves appropriately to meet their personal spending and savings goals. Too often, business owners leave this up to their accountants who may advise leaving as much money as possible inside the business rather than paying taxes personally. But, hey, you need to eat, and heat your home, and travel, and pay for your kids’ activities, and contribute to your RRSP or TFSA. Make sure you pay yourself accordingly.

Weekend Reading:

A Wealth of Common Sense blogger Ben Carlson explains why the stock market is not a casino:

“The stock market is the opposite of a casino. The longer you play, the higher your odds of success in terms of experiencing positive returns on your capital. The ability to think and act for the long-term is your edge as an individual investor. Patience is the ultimate equalizer.”

Investment advisor Markus Muhs bluntly says that investors should stop gambling on stocks. I agree 100%. We often sweat over the smallest details, like saving an extra 0.04% MER on a globally diversified ETF, or saving $4.95 per trade, but then turn around and dump 10% of our hard earned savings into individual stocks. I don’t get it.

Speaking of sweating over minor details, Justin Bender says that many DIY investors may be tempted to sell their all-equity ETF to save on fees – purchasing the underlying ETFs directly instead. Before taking the plunge, check out this video for several reasons why you should just stick with a single ETF:

Roc Carrick explains why firing your investment advisor to buy index funds could backfire (subs). I may be biased, but a DIY index investor pairs quite nicely with a fee-only financial planner that you can hire as needed to check in on your finances and update your financial plan. Just sayin’…

Here’s Squawkfox Kerry Taylor on why material things won’t make you happy (and what will).

Fee-only advisor Anita Bruinsma says if you’re experiencing a challenge with your money then you need to take an honest look at yourself and your numbers and face the facts.

PWL Capital’s Ben Felix explains why covered call ETFs sound too good to be true – because they are. Avoid ’em.

If you’re buying a new home and thinking about renting out your old one, don’t make this crucial mistake. Definitely not a strategy for me!

These are the biggest myths in personal finance — and they’ll cost you if followed blindly. Nice piece by Jason Heath.

Millionaire Teacher Andrew Hallam on how a cycle crash led to an important lesson in business and life.

Finally, why rethinking retirement might help solve Canada’s demographic crunch.

Have a great weekend, everyone!