My latest podcast interview – The Rational Reminder Podcast

I was recently interviewed by Ben Felix and Cameron Passmore, portfolio managers at PWL Capital, for their Rational Reminder Podcast. I thank Ben and Cameron for the interview. It was fun and they had some great questions.

Here’s a link to the podcast.

On the podcast we discuss a bunch of really interesting topics. Here are some highlights:

• Why it is important to ensure that both spouses are relatively financially literate
• When it makes sense to hire a corporate executor
• Why you should involve your adult children in financial conversations
• Why you may want to consolidate your investment holdings
• How to deal with potential uneven distribution in an estate
• Why success is not always linked to money
• How I define my own personal success

The last question, about my own personal success, was a surprising question from Ben and Cameron. I was expecting to only discuss and provide advice on getting your financial affairs in order, not my personal successes. Afterwards, I thought about that question and my answers and was a bit surprised where I went with my answers, especially my comment on jealousy. I became so introspective on that answer that during the holiday break I wrote a blog post on that topic and will publish it in a couple months.

Anyways, I think this podcast is worth a listen and you may also want to check out some of the other interesting podcasts Ben and Cameron have made.

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.

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.

Let me tell you! William Bengen knows how to define success

Today I bring back my old “Let me tell you!” series, where I delve into topics that are more philosophical than financial. In this blog post, I discuss the three life questions financial guru William Bengen asks himself each night before he goes to sleep.

Mr. Bengen is a bit of legend in financial circles. He created the ubiquitous 4% retirement rule: that people can withdraw 4% of their savings every year in retirement and still support themselves financially. I have written about this rule several times in my “How much do you need to retire” posts. The last time was in February.

But Mr. Bengen also has some interesting thoughts beyond finances. In February he joined the Rational Reminder Podcast to discuss retirement planning, and also shared his thoughts on success in general. (By the way, I was also interviewed for this podcast last year.)

Bengen defines success  

Podcast hosts Benjamin Felix and Cameron Passmore typically ask all guests the same last question: “How do you define success in your life?” I found Mr. Bengen’s answer fascinating.

“That's a wonderful question for everyone, I guess," he said. "Before I go to bed each night, I've done this for a number of years, I ask myself three questions.

"And the first question is, today, did I learn anything new, or did I create something? The second question is, did I do anything to help anybody, particularly people I love, but even if for a stranger, maybe helping an old lady across the street, or helping a child understand a math problem? And the last point is, have I given proper attention to this, the mystery and wonder of the world in the universe, and being alive and being able to experience all this? If I can answer yes to all those three questions during the day, I felt I've had a successful day.”

While the above quote has nothing to do with Mr. Bengen’s brilliant financial planning, it shows a truly insightful mind that looks at success as more than just fame and financial success. As I wrote two fairly popular blog posts on money and success in 2012 (see here and here), his comments intrigued me. Today I break down his thoughts.

"Did I learn anything new ... or did I create something?"

Wow, did this answer strike a chord. In 2018 I wrote a post making the case that if you are not learning, you are forgetting. My father-in-law has espoused this mantra all his life, and his children and grandchildren live by it. A hunger for learning has so many positive aspects. It keeps your mind active, allows you to pass knowledge down to your family and friends, helps you in your day-to-day business interactions and opens your mind to concepts and thoughts you may have previously dismissed. I do not want to dismiss the second part of Mr. Bengen’s question - “did I create something” - but that would be a more limited question in most cases.

"Did I do anything to help anybody today?"

While Mr. Bengen initially spoke about helping family, he expanded that to helping anyone. As I think most of us tend to help our family as a given, I will veer off into the topic of helping anyone.

While helping an old person across the street or holding a door open is quick and simple (is it me, or is holding the door open a lost courtesy? I do this all the time but constantly have doors slammed in my face when walking behind other people), I personally appreciate those who give time to causes.

Time is precious and to give to others is incredibly special. I have a good volunteering track record compared to the average person: being a Big Brother, granting wishes under the Make-A-Wish Foundation framework, and sitting on a couple charity boards. But when I see how much more others do, I am often humbled. Coming out of COVID, I suggest you consider giving of yourself whenever and wherever.

One can also help financially. One can argue this is an easy way out, but I disagree. Organizations need volunteers, but they also need money. I recently wrote a post explaining why donating marketable securities provides an altruistic benefit and a tax benefit.

"Have I given proper attention to this, the mystery and wonder of the world in the universe?"

I really like this last question. We are often startled by nature and the general wonders of the world; however, I would suggest this happens far too little. My only comment here is that COVID took many of us to negative places, mentally and physically (offset by some heroic front line and other efforts by special people). It would probably do us some good as we start moving back to a “new normal” to appreciate some of the mystery and wonders of the world, to recharge our positive selves.

My concern with any of my “Let me tell you!” posts is they become preachy. But I hope today’s post on Mr. Bengen’s nighttime routine provides you some helpful thoughts for reflection.

Note on new email system

For those of you who are subscribers and received this post via email, you may have noticed a small difference in the email notification. I have changed to follow.it as my email provider, part of my ongoing efforts to use the most up-to-date technology. If you would like to subscribe to the blog, enter your email in the box at the top right corner of this page.

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.

Financial Rules of Thumb

I thought today, I would discuss some financial rules of thumb. All these rules should be taken with a large grain of salt, but they can sometimes provide an initial starting point from which to work. Please do not consider any of these rules as gospel.

Investment Returns

The “Rule of 72” is an actual rule you can use with confidence, as it is mathematical. The rule simply tells you how long it will take for your money to double, at a fixed rate of return.

The formula is 72/interest rate (or annual rate of return) = number of years it will take for your money to double.

For example, if your interest rate is 10%, that means your money will double every 7 years or so (divide 72 by 10 = 7.2 years to double).

A return of 5% will take 14.4 years to double and a return of 7% will take 10.3 years to double.

Retirement Withdrawal Rate

The 4% Rule

Financial planner William Bengen advocated the 4% rule almost 30 years ago to address his clients’ questions about what is a safe yearly withdrawal rate from their retirement portfolio. Mr. Bengen looked to data from as far back as 1926. He determined that given a portfolio split evenly between stocks and bonds, a 4% withdrawal rate (adjusted for inflation each subsequent year) should provide adequate cash flow for a retirement spanning at least 30 years.

The 4% rule has been one of the most debated rules in finance for several years and I have written numerous articles on this topic over the years. Mr. Bengen has suggested in recent years, that an even higher withdrawal rate would be safe, while others suggest a more conservative rate such 3%. 

 

Given the current rate of inflation, one would wonder if the 4% rule would quickly fall offside. However, in an interview on the Rational Reminder Podcast ,Mr. Bengen comments in the podcast that one scenario that broke the 4% rule, was a scenario in which the retiree encountered double digit inflation for the first 15 years of retirement. So surprisingly, the rule seems to withstand inflation well.

The 4% rule works as follows: say you need $100,000 a year to fund your retirement expenses; you would dividend $100,000/4% and the calculation would suggest you need a nest-egg of $2,500,000. The $2,500,000 nest-egg would allow you take draw $100,000 a year for 30 years without running out of money. 

The Rule of 20

The rule of 20 or for some 25, means you need $20 or $25 of savings for every dollar you expect to spend in retirement.

For example, if you want to live off $100,000 a year, you will need either $2,000,000 ($100,00 x 20) or $2,500,000 ($100,000 x 25).

You will note the 25 times number brings you to the same retirement nest-egg as the 4% rule; that is because the rule is a derivative of the 4% rule.

Budgeting

The 50/30/20 Rule

This rule was created by Senator Elizabeth Warren (a Harvard law professor when she coined the term) and her daughter, Amelia Warren Tyagi, in the book All Your Worth: The Ultimate Lifetime Money Plan.

This rule of thumb suggests you allocate 50% of your after-tax income to your needs (rent, groceries, utilities etc.), 30% to your wants (hobbies, restaurants, streaming services etc.) and 20% for retirement and savings goals.

A small variation on this rule is the 80-20 plan. Under this method you first set-aside 20% of your after-tax earning into a savings account and the remaining 80% is then spent as needed.

Emergency Fund

A common rule of thumb is to set aside three to six months of expenses in an emergency fund. It is suggested the number of months increase to 8 or more months where you have a job in a volatile field of work.

Unfortunately, the reality and shortcomings of this rule were reflected when COVID-19 shut down the economy and job market for many people.

Life Insurance

How much life insurance you need is really dependent upon your personal situation. A general rule of thumb is you require 6-10 times your gross annual salary in life insurance (in almost all cases this type of insurance should be term insurance, with possibly a conversion option at a future date in the policy). However, the 6-10 multiplier can be higher if you have young children, a mortgage, stay at home spouse etc. You really need to review your specific situation and what you think your family would need if you passed away. I discussed some of these considerations in this 2016 blog.

Appliance Repairs

I have no idea of the origin of this rule, but this rule of thumb states that when an appliance breaks, buy a new one if the appliance is 8+ years old or the repair would cost more than half the replacement cost. 

Big Ticket Purchases

The Rule of 10

I like this rule. The rule of 10 is like the twenty-four-hour rule in hockey before a parent can talk to the coach. It provides for a cooling period. The rule of 10 is for large discretionary purchases. The rule says to reflect on how the purchase will make you feel in 10 days, 10 weeks and 10 years.

The cooling period should be equal to one day for every $500-$1,000 of purchase costs, which seems a little long to me. I would suggest a 7-10 day cooling period should be sufficient for most people.   

 

Rules of thumb are simple, convenient and in some cases, a good guideline. However, please do not consider any of these rules as gospel.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.