My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, April 5, 2021

Confessions of a Tax Season Accountant — 2021 Edition

In the old days of this blog, some readers may recall I wrote a series of posts titled “Confessions of a Tax Accountant” during income tax season. Those posts would discuss interesting or contentious income tax and filing issues that arose as I prepared my clients’ tax returns. Two years ago I condensed the confessions down to a single confession. Last year COVID struck. I didn’t confess last year. I just prayed.

Today, to bring some normalcy back to the blog, I will again provide a single tax season confession for the 2021 tax season.

Home office claims

The most important change for your 2020 tax filing is how you claim your home office expenses. I detailed these changes a month ago, so please refer there for more details.

A couple new tax credits


For 2020, there are a couple new tax credits:
  • Digital News Subscription Credit – This non-refundable credit may be available if you paid for a digital news subscription in 2020. The limit is $500. You can find the details here.
  • Canada Training Credit – Per the CRA, “Eligible workers of at least 25 years old and less than 65 years old at the end of 2019 and later years, and who meet certain conditions will accumulate $250 a year, up to a lifetime limit of $5,000 to be used in calculating their Canada Training Credit, a new refundable tax credit available for 2020 and future years. Based on the information on their return, the CRA will determine their Canada training credit limit for the 2020 tax year and provide it to them on their notice of assessment for 2019 and will be available in My Account.”

U.S. capital gains reports


I apologize for repeating this point—it’s at least the fourth time I’m mentioning it on the blog—but it is a major pet peeve of mine. Here goes: We continue to receive realized capital gains reports for clients for their U.S. holdings brokerage accounts that are not properly converted for Canadian taxes.

To properly report your U.S. or any foreign stocks trades, the original purchase should be converted at the exchange rate at the date of purchase (or, if not available, at the average exchange rate for the year of purchase), and the sale should be converted at the exchange rate on the date of sale (or, if not available, at the average exchange rate for 2020).

I continue to receive capital gain reports with both the purchase and sale converted at the 2020 average exchange rate. Since the U.S. dollar has risen over the years, a purchase made several years ago likely would have a large foreign exchange gain component that is not being reported.

Property received by inheritance


As baby boomers or, more particularly, their parents age and pass away, many Canadians have inherited real estate, stocks or other capital property. A tax season issue I have been noticing is that people who have inherited property and then sold it often do not know what their adjusted cost base is on the inherited property. This is problematic in determining the related capital gain.

The reason for this cost base gap is most typically that the child who inherited the property does not have a copy of their parent’s terminal tax return (final tax return of the parent for their year of death). On a terminal return, there is what is known as a deemed disposition that reports the fair market value of a deceased person’s real estate, stocks or other capital property. The deemed disposition amount would become the child’s adjusted cost base for when they sell the property.

This is best explained by an example. Say Mr. A and Mrs. A were the parents of Susan. Mr. A and Mrs. A owned a cottage property that was purchased many years ago for $200,000. When Mr. A passed away 10 years ago, he left the cottage to Mrs. A (this is typically a tax-free spousal transfer with no tax implications). However, Mrs. A passed away five years ago when the cottage was worth $900,000. When Mrs. A’s accountant filed her terminal return, they reported a deemed disposition of the real estate at $900,000 and paid capital gains tax on the gain of $700,000 ($900,000 value at death less $200,000 original cost). Susan’s adjusted cost base upon inheritance became the $900,000 deemed disposition amount.

Where you have inherited real estate, stocks or other capital property, it is important that you obtain and keep a copy your parent’s final tax return so you can provide your accountant the return to ensure the correct adjusted cost base if reported when you sell the property.

Medical receipts


Many clients provide multiple tax receipts for the same pharmacy or medical practitioner. Your accountant will love you if you ask the pharmacy and your medical practitioners to provide a yearly summary of all payments, so your accountant only has to deal with a few receipts instead of multiple receipts.

Here’s hoping you have a 2020 refund or owe less tax than you anticipated. 

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, March 22, 2021

How much do you need to retire in Canada? (Part 4)

In the first three parts of this series, the focus was on the safe-withdrawal rate for retirement. Today, in the final installment of this series, I revisit factors I discussed in my 2014 retirement series that can impact both the funding of your retirement nest egg and your withdrawal rate in retirement. The randomness and unpredictability of these factors can derail even the most detailed retirement plans.

How long am I going to live?

In Canada, depending upon which study you utilize, the average male will now live to approximately 80 years old and the average female to around 84 years old. There is also around a 50% chance that one spouse will live to age 90 if both are alive at 65 years old and a 20% chance one spouse will reach 95, again depending upon which study you review. These numbers are not intended to provide absolute actuarial accuracy but to reflect your planning needs. Bottom line: There is a good chance one spouse will still be alive at 95 years old.

The fact that we don’t know how long we’ll live creates the ultimate dilemma of retirement: do you scrimp in the early years of retirement, when you are likely healthier and full of energy, to ensure you have money to support yourself if you live longer than average?

I have seen far too many people die without spending their nest egg and enjoying their retirement (and as the Michael Kitces studies noted earlier in this series reflect, most people’s nest eggs seem to last longer than expected). I am in the camp that values those early retirement years, without being reckless about saving. Based on the studies, I would consider erring slightly on the side of early-retirement spending.

Interest Rates


We have been in an unprecedentedly low-interest environment for many years, and it’s now been exacerbated by COVID. This has weakened the benefit of GICs, term deposits and similar investments to fund and keep funding retirement. Bonds have been a bit of a buffer, but if rates turn upward, bonds may not provide the backstop they have over the last few years.

There is no consensus answer for this issue. Many investment advisors are suggesting a higher allocation to equities, but this involves far more risk than many people are willing to assume. So, this is a current-day quandary that has no clear answer.

Inflation


In addition to being in a low-interest rate environment, we have also been in a period of low inflation. Post-pandemic, it is unclear if inflation will rear its ugly head again, but a strong recovery could be problematic. An economic environment of low market returns and high inflation can severely impact the funds you accumulate to fund your retirement and the real returns you achieve in retirement.

Sequence of returns risk


Sequence-of-returns risk for purposes of retirement planning refers to the random order in which investment returns occur and the impact of those random returns on people who are in retirement. In plain English, it relates to whether you are the unlucky person that retires into a bear market or the lucky person who retires into a bull market. This is important because if your returns are poor early on, your retirement nest egg will not last as long as someone who had good returns early in retirement.

The sequence of returns phenomenon is illustrated very clearly on page 7 of this report by Moshe Milevsky and by W. Van Harlow of Fidelity Research Institute. In this example, two portfolios have the same return over 21 years but in inverse order. The portfolio with the positive returns initially ends up worth $447,225 in year 13, while the portfolio with the negative returns was depleted in year 13.

If you are looking for solace about retiring at a market peak, read this blog I posted in 2019. There I discuss an article by Norman Rothery on the sustainability of the 4% rule even when you start your retirement in a poor market.

Michael Kitces, whom I referenced in my blog post a couple weeks ago, has also written extensively on the sequence of return phenomenon. As noted in the prior posts in this series, Mr. Kitces has used the worst years in history as his floor for the 4% rule, and the rule held up. Here are a few helpful links on his sequence of returns articles:


Can you solve for the sequence of returns?


Finally, Mr. Kitces and Wade Pfau, whom I noted in Part 2 of the series, both seem to agree that people can reduce the impact of sequence of returns near to or early in retirement by using something called a rising equity glidepath in retirement.

This strategy has you starting retirement with a lower equity component in your portfolio—30%, for example—and increasing it throughout retirement to, say 65% or 70%. The advice is counterintuitive, since consensus advice has always been to reduce equity as we age. But as Mr. Kitces and Mr. Pfau point out here and here (at the 6:12 mark), the glidepath actually reduces losses in your nest egg when you most need it (at the beginning of your retirement) and allows for recovery in later years as your equity increases. You may lessen your child’s inheritance, but you may protect yours.

I am not saying yeah or nay on the glidepath alternative but rather providing you with some alternative thoughts.

Your principal residence


While most of us would love to ignore the value of our home for purposes of our retirement planning, the reality is that for most Canadians, our homes will in small or large part fund our retirements. For some, their home will just backstop any retirement shortfall; for many, their retirement funding includes at least the incremental capital benefit of downsizing their home; and for most, retirement can only be fully funded by selling their home at some point in their retirement.

Parenthetically, the same applies to business owners, who often consider selling the business to support their retirement plans. Business owners do need to add several factors when planning their retirement.

The scary thing about relying upon your home is that its reliability for retirement funding depends on a key variable: its value upon sale (and continued tax-exempt status).

What will my house be worth?


Over the last 10 years, house prices have skyrocketed in most Canadian cities. The million-dollar question is whether these increases in value will continue. Interest rates may increase. Government policy may change. And baby boomer sellers may eventually outnumber younger buyers.

What can I do?


Almost all the factors discussed in this post are impossible to plan for. However, you can adapt and compensate in two ways.

Work Longer

While the old retirement ideal was to sit back and sip cocktails in retirement, many now believe in finding part-time work during the victory lap period of life—or even full-time work doing something you enjoy that pays less. People often say it makes them feel more alive and keeps them mentally sharp, while providing the added benefit of not dipping into their capital. Remembering this may provide comfort if you need to work after you retire to account for the factors above.

Reduce your yearly withdrawal rate


Although possibly challenging, if your nest egg takes a hit due to any of the above factors, you can reduce your yearly withdrawal rate from, say, 4% to 3%, by some dollar value, or the future inflation withdrawal rate as suggested earlier in the series. It’s a tough pill to swallow, but you may need to forgo some short-term plans, perhaps travel for a year or two. As we learned this year, we can all adapt far better than we ever thought if we absolutely need to.

Life is hard enough to plan when things are status quo. It really gets challenging when random economic factors impact your life or retirement planning. The best we can do is recognize these factors exist and adapt and adjust when they arrive.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, March 8, 2021

Claiming your home office on your 2020 personal tax return

In 2020, we received a crash course on working from our homes. To the surprise of many of us, we quickly adapted. We redesigned our workspaces and purchased laptops, adapters, monitors (first or second or third screens), and scanners.

As we approach the 2020 personal income tax filing season, we now turn our heads to determine which expenses we can claim on our tax returns for working from our home offices.

The CRA has also had to adapt quickly to the new normal, and it has provided a couple of different ways for employees to claim home office (HO) expenses in 2020. They are discussed in detail in this BDO tax insight. As I see no reason to repeat this excellent summary word for word, I will quickly recap it and add a couple comments that may be of interest.

To be blunt, since I am The Blunt Bean Counter, I’ll share an observation. Those of us who drove our car for work and did a fair amount of driving to clients and customers in 2019 will most likely find that the additional home office expenses we can claim in 2020 do not make up for the lower car expenses you will be able to deduct this year. As a result, you’ll likely have lower overall employment expenses to claim this year.

Below I summarize the various alternatives to claim your 2020 HO expenses.

New Temporary Flat Method


This method will allow a flat $2 per day for 200 days, so $400 in total (see the BDO piece for the criteria). The best thing about this method is you do not need to track expenses or file the T2200 form, which is completed by your employer and allows you to claim expenses you incur to do your job, such as your home office, car, and telephone). Instead, you will file a Form T777S, Statement of Employment Expenses for Working at Home Due to COVID-19.

The flat method is available only for 2020, per the CRA. That said, it could conceivably extend the exception for 2021, depending on how quickly the pandemic subsides and how this impacts remote work.

This method is great for those who struggle to keep records and track their receipts, and have not incurred much in the way of deductible home office expenses in 2020. However, I would suggest that for many Canadians, filing using the flat method will leave a fair amount of expenses on the table.

Detailed Method


The detailed method will allow you as an employee to claim the actual amount of HO expenses related to your work from home in 2020. As noted in the BDO tax alert, the “usual way of claiming home office expenses requires you to determine the proportional size of your workspace compared to total finished areas within your home, and the employment use percentage of your workspace in order to calculate your workspace in home deduction. Though these calculations can be tedious, the CRA has provided examples and a new calculator to assist.”

For 2020, if you will be claiming only HO expenses and no other employment expenses on your 2020 return, and you were not eligible to claim HO expenses prior to COVID, you will need your employer to complete Form T2200S, and you will need to complete the simplified Form T777S on your tax return.

If you will be claiming other employment expenses, such as your car or phone, you will need your employer to complete the standard Form T2200, Declaration of Conditions of Employment, and complete the standard Form T777.

It should be noted that if you are claiming HO expenses (see this CRA summary), you can only claim your property taxes and insurance if you earn commissions from your employment (if you earn commission, your total employment expense deduction can’t exceed your commission income). Thus, the home office claim is often not as large as most people expect.

I am often asked how much the CRA will allow as the percentage use for your home office space. I cannot provide a standard answer. Per the CRA as mentioned in the BDO piece, you are required to undertake a detailed calculation of the actual space you use for your office as a percentage of your home’s finished square footage.

I will tell you this. Over many years of preparing tax returns, the typical HO claim assumes a percentage use of between 5% and 15%most are 5-10%, and very few are greater than 15%. To reiterate, your claim must be based on your actual square footage use.

Business Income


If you earn business income, as opposed to employment income, everything is status quo. There are no changes to the rules or the way you claim your HO expenses. The CRA made these changes to accommodate employees who typically work out of a physical office but could not do so this year.

I would suggest that over the next few weeks you review your situation to determine which of the above methods best suits your particular circumstances. If you are using the detailed method, start accumulating the required receipts so you can ensure you maximize your HO claim.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, February 22, 2021

How much do you need to retire in Canada? (Part 3)

When we last talked about the amount of money you need to retire, we discussed the critical research from Michael Kitces, a pre-eminent retirement expert in the United States. His work looks at the 4% safe withdrawal rule first proposed by William Bengen, which helps investors map out their wealth strategy in retirement.

This week let’s dig deeper by presenting some dissenting opinions on the 4% rule and detailing what the 4% rule actually means. I’ll also offer my suggestions on how to implement the rule into your wealth strategy.

How accurate is the 4% withdrawal rule?


Whenever we hear universal rules about investing, we need to question how universal they truly are.

Fortunately for us, Mr. Bengen himself shares some key fine print. He has suggested that the 4% rule was a creation of the media and that he actually more often than not used 4.5% with his clients. In today’s investment climate, he says, he would use 4.5% or even slightly higher as a rule of thumb. He also says he would increase his equity holdings from 50% to 70% in dividend paying stocks given today’s low interest rates—if they can be purchased at reasonable valuations.

At this juncture, I need to make like an infomercial and disclaim that while Mr. Kitces and others research have shown the 4% withdrawal rule to be safe, there is no guarantee it will apply in the future, especially given the historically low interest rate environment.

In fact, Wade Pfau, who is profiled in my 2014 series and is still at the forefront of retirement planning, says that “the 4% rule does not apply today, as retirees face the lowest interest rate environment we have ever seen. It also was never meant to apply for those who were not willing to hold at least 50% stocks throughout their retirements.” Mr. Pfau suggests a withdrawal rate as low as 2.4% may be appropriate given the low interest rates.

It is interesting to note that Mr. Kitces and Mr. Pfau both agree that a rising equity glidepath in retirement—starting with a lower equity component and increasing equity exposure over time (which is counter intuitive and in contrast to the typical advice that one should decrease equity exposure as you age)—may be beneficial. I will discuss this in greater detail in Part 4 of this series.

While I have no illusion that I am a retirement specialist, my experience with clients and the studies above have made me believe that the 4% rule is a good starting point for your retirement nest egg planning (especially if you are willing to adjust your yearly withdrawal rate in poor markets). In fact, during multiple meetings with clients and their various Investment managers this year, the consensus is almost unanimous that future returns will be lower over the next 10 to 20 years, but in most cases, the expected return of an equity-tilted portfolio is still well above four percent. Again, I caveat, these expected returns by investment managers, may vary from actual results.

My takeaways

  1. Determine to the best of your ability your expected yearly cash requirements in retirement and use the 4% rule to give you an idea where you stand with your retirement planning. If you need $100,000 a year in retirement, the 4% rule says you will require a nest-egg of $2,500,000.
  2. Engage a financial planner to prepare a detailed financial plan. The 4% rule has been proven to be historically accurate, but a detailed personalized plan is always beneficial. Have your financial planner run alternative scenarios using, say, a 3% and 4% withdrawal rate. If you have an investment advisor, see if they will prepare a financial plan free of charge as part of your investment fee. Keep in mind: a report from your investment advisor in some cases may include suggestions for certain products their institution sells.
  3. If you have been retired involuntarily and were only a few years from your planned retirement date, use the 4% rule of thumb to determine what you need to earn to fund your retirement. As noted by Mr. Kitces, he has often found people forced themselves to work longer than needed, and if you can make up some of your missing salary with a part-time job or consulting gig, you may be okay to take “partial” retirement early. Again, I would suggest speaking to a financial planner to tailor your fact situation to your plan.
  4. If you retired voluntarily, consider working part-time or at something you love, to enhance your capital, keep your mind sharp and—at least in my case—your spouse from killing you.
  5. If the markets go down during retirement, always pre-plan what expenses you can reduce (or as Mr. Kitces suggests, consider reducing your inflation-adjusted spending going forward), so that you can reduce your withdrawal rate for a few years.

It has been a crazy last year and many retirement plans have been turned upside down. Whether you have been sideswiped by the topsy-turvy business climate of the pandemic or been one of the lucky ones to thrive, you should still revisit your retirement planning and nest egg objective.

I am going to briefly interrupt our retirement series to bring you a timely post on claiming home office expenses on your 2020 personal tax return during COVID-19. Following that post, I will conclude this series with a quick recap of some of the factors that impact your retirement planning.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, February 15, 2021

New for business owners: Guide to Selling Your Business

Selling a business is one of the most important decisions any business owner can make. So, in a way it’s surprising how many leave the process not exactly to chance but at least to the relative last minute.

This procrastination around succession carries with it huge consequences. Planning a sale takes time–we usually say about two years from plan to fruition. And there’s a lot to do–from enhancing the value of the business, to a valuation, to navigating the due diligence by the buyer, to tackling the final negotiations on sale price.

The process can become nuanced and technical. The tax implications are steep and long-lasting–but taking action before the sale closes helps you control the process and protect yourself, your family, and your legacy.

My colleagues at BDO put together a handy guide to help business owners sell their business. It covers the main topics that you should get a handle on–plus it gives tailored tips for several key industries. You can download the new guide here.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, February 8, 2021

How much do you need to retire in Canada? (Part 2)

Two weeks ago, I reminisced about a six-part retirement series I wrote in 2014—and how COVID-19 has affected many people’s retirement. I noted that in some cases people have lost jobs, had the value of their small business eroded, or realized they would need to invest in technology for their business to compete in a new normal. In other cases, people have become contemplative and decided to retire early (such as I am doing on December 31st) or switch careers.

Today, I discuss a study on the subject by Michael Kitces, a pre-eminent retirement expert in the United States. We’ll analyze his views on a safe withdrawal rate in retirement. Keep in mind that the safe withdrawal rate is then used to reverse-engineer your required nest egg for retirement.

Markets


Over the six years since I wrote the retirement series, unless you were GIC centric or Canadian-equity centric, you likely would have had above average stock market returns. Consequently, your sequence of returns (whether your returns are strong or weak at the beginning of your retirement, discussed in greater detail in Part 4 of this series) would have likely been advantageous to your retirement. I personally have not seen anyone fall off the rails from their retirement plan, but six years of relatively good markets is not exactly a great sample size.

The famous 4% withdrawal rule


My 2014 series centered around what is the most commonly accepted rule of thumb for retirement, the 4% withdrawal rule. Created by William Bengen, this rule says that if you have an equally balanced portfolio of stocks and bonds, you should be able to withdraw 4% of your retirement savings each year, adjusted for inflation, and those savings will last for 30 years. So if you need $100,000 a year to live in retirement, you will need a nest egg of $2.5 million ($100,000/.04).

The 2014 series discussed some of the deficiencies experts feel are inherent in the 4% rule: the withdrawal rate doesn’t take income tax into account; it ignores management fees; the equity portfolio lacked international diversity (as it was US centric); that it was premised on a historically higher interest rates for the fixed income (bond) portion of the portfolio and used a constant set 4% withdrawal rate.

Since I wrote the initial series, Michael Kitces has come to the forefront as one of the great retirement researchers and planners in the United States. He has written several articles on the 4% withdrawal rule. Mr. Kitces is not only a great researcher, but he is also a very engaging speaker, who is able to passionately break down a complicated topic into plain English. I will therefore link to three YouTube podcasts that I think you will find highly informative and should listen to if you are interested in what your withdrawal rate should be in retirement.

What Michael Kitces says about the 4% withdrawal rule


Mr. Kitces has written and been interviewed about the 4% rule many times over the years. He has noted the following findings in respect of the 4% rule:
  1. The three worst retirement start dates in history were 1907, 1929 and 1966, and these form the floor of the 4% rule. It is extremely important to understand that the historical safe withdrawal rate of 4% is not based on historical averages (if they were, he notes the withdrawal rate would be much higher), but they are based on the three worst historical 30-year retirement periods noted above. These three worst periods would have allowed a retiree to just barely meet the 4% withdrawal scenario. That is why he and others consider the 4% rule a safe withdrawal rate; it is a historical worst-case scenario, not an average.
  2. The safe withdrawal rate has a 96% probability of leaving more than 100% of the original principal (these are nominal returns, not inflation-adjusted returns, but still your original principal is almost all intact in historical dollars - this was startling to me).
  3. The median value (50% of the time) is 2.8 times the original principal. Thus, you have a high likelihood of having more money by the time you die, not running out of it.
  4. Only one time does the retiree run out of money and that is in Year 31 of retirement.
So despite the inherent flaws in the 4% rule, I note in the fifth paragraph of this post, Mr. Kitces is of the view that because historical safe withdrawal rates are not based on historical averages but rather on historical worst-case scenarios, the 4% rule is more than an excellent rule of thumb.

Where to hear directly from Kitces


If you are serious about understanding the 4% rule and Mr. Kitces’s views on it, you need to listen to at least one of these YouTube/podcasts:
  • I like this April 2020 interview of Mr. Kitces by the bloggers behind the BiggerPockets blog, because it was in the midst of the COVID stock crash and Mr. Kitces was unfazed. He just analyzed the situation and explained everything clearly but still passionately. I would scroll down to the YouTube video in lieu of the podcast. One quick comment about this podcast. There are some references to “FIRE.” FIRE is an acronym for “financial independence retire early” and is only applicable if you plan to retire early.
  • Another excellent and current podcast, this one with a Canadian bent (and a different focus from the above podcast), is this August 2020 interview of Mr. Kitces by the Rational Reminder team of Ben Felix and Cameron Passmore. You may recall that the same pair interviewed me last year on various financial topics.
  • Finally, for the diehards, another interesting listen is this October 2020 podcast, in which Mr. Kitces interviews the father of the 4% rule himself, Mr. Bengen (he was actually a rocket scientist before becoming a financial planner). This podcast includes a bit more about Mr. Bengen’s history, so you may want to peruse the index to listen to the parts you are interested in if you are not interested in Mr. Bengen personally.
If you prefer reading to watching, you might want to have a look at this 2015 blog post by Mr. Kitces. It should be noted that Mr. Kitces uses a 60% equity and 40% fixed income model in this study, whereas Mr. Bengen used a 50/50 model.

Have a watch (or least a look if you don’t have time to listen to any of the podcasts) at some of the links above. We’ll pick up the conversation on this series next time by fleshing out some perspective (including dissenting opinions on the 4% rule) on what the 4% rule actually means and offering my suggestions on how to implement the rule into your wealth strategy.
 
The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, January 25, 2021

How much do you need to retire in Canada?

In 2014, I wrote a six-part series on retirement called “How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!” The series was not only six parts but also over 10,700 words and I am sure over 60 hours of research, writing and editing. I recall telling myself, “Never again,” after completing this series. If you wish to read the series in full, you can find the links to the six posts on the right-hand side of my blog under the retirement planning category.

I also recall it was somewhat depressing to realize that after all that work, I couldn’t come up with a definitive determination of the actual nest egg you require. No one can. There are simply too many inputs, variables, models, simulators and varied expert opinions.

That being said, there was still a ray of sunlight in the series. I found that after using multiple models for my sample calculations, I was able to map out a range of retirement savings that likely would provide a realistic retirement goal, especially if twinned with a financial plan that is updated every few years. So, while it is likely impossible to determine your retirement nest egg to the nth degree, you can provide yourself a realistic retirement savings objective with some work and planning.

At this point you’re likely saying, why is Mark rambling on about a series he wrote almost seven years ago? The reason is COVID.

The pandemic has brought retirement savings front and centre for far too many of us.

In some circumstances, people have lost jobs or their own small businesses that they expected to work at until retirement.

In other cases, people may be succeeding financially but have become more contemplative during COVID. They have begun to think about the long term and what they really want out of life. Maybe it is time for a change in career or time to retire early while healthy and still invigorated. (Full disclosure: I am one of the people in this group and made the decision to retire from public accounting at the end of 2021.) Some have even decided to retire early and follow the advice of Mike Drak and Jonathan Chevreau in their book Victory Lap. They say people should leave their day job behind once they’ve reached financial independence, and work at something they love or always wanted to do to make some supplemental income.

Canadians who pivoted to retire early caused many a financial advisor to pull their hair out. They typically advised clients to just push through the next couple years, as there is too much financial uncertainty to retire early. But based on what I have seen and heard, early retirements have not been uncommon, despite not necessarily being the financially prudent thing to do. (Although if you listen to the Michael Kitces podcasts, I will reference in this series, you will hear his research that many people should have been retiring early for years, assuming they continued to work part-time at a minimum.)

And that’s why COVID has prompted me to revisit this series. For those retiring soon, or just planning for the future, it’s a great time to rejig these topics with some new research and expert opinions. You will be pleased to know that I have learned restraint over the last six years: The 2021 series will be “only” a few parts and a mere 3,200 words give or take.

I will stop here today. The next 1,600 words or so require a clear mind, as retirement planning and determining a safe withdrawal rate in retirement are surprisingly academic topics. I will discus this methodology in Part Two of this series and am also looking forward to reviewing a couple of the top retirement experts’ studies and suggestions.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.