Weekend Reading – Afraid of a bear market, 4% rules, embracing slow FI and more #moneystuff
Hey Everyone,
Welcome to my latest Weekend Reading edition where I share some of my favourite articles from the week that was across the personal finance and investing blogosphere.
Earlier this week, I published these articles:
This was our update to financial freedom update. Getting closer to realizing a major milestone!
Thanks to reader questions and follow-ups on various ETF posts over the last few months, I decided to update previous content on my site and share what I believe are the top dividend ETFs from Canada, U.S. and to hold international stocks from. Based on the distributions from these ETFs, I believe if you own a few of these products you can essentially earn cash for life. Spending the distributions (only) is like having a part-time job from your portfolio – forever!
On that note, GenX, what are your income stream plans for semi-retirement or retirement?
As a millennial just starting out with investing how are you going to invest to earn money from your portfolio?
As always, if you have questions about my approach or other investing questions please leave me a comment or drop me a line via my Contact page. I will try and get to your email as soon as I can and in some cases, I will consider publishing your question (and my answer) on this site!
Weekend Reads
Kyle Prevost wrote a monster post about the 4% rule on Million Dollar Journey. I personally think this rule is “safe” (3% is very, very safe in fact) as long as 1) you’re close to 100% equities and 2) you intend to own a basket of mostly dividend paying equities or dividend ETFs. I have plans to talk to a Certified Financial Planner about what he thinks about the 4% rule and other matters soon.
Reverse the Crush is embracing a slow path to financial independence. This is something I can relate to since if my wife and I really, really wanted to be financially independent, we could have made the leap already by not owning a condo and just renting a small apartment here in Ottawa. That said, home ownership was important to us; a place to call home and therefore more years of work are required to vanquish the debt dragon.
We did downsize and that’s been a huge enabler to simplifying our life and home – which is why you should at least consider downsizing at some point to weigh through your own pros and cons of doing so…
The slower path to financial freedom is also an approach that aligns to what The Fioneers write about and are passionate about, they embrace Slow FI.
The BIG ERN (Early Retirement Now) site pondered who is afraid of a bear market? After meeting him at FinCon this year, I doubt he’s afraid of any market. He invests rather wisely and rather well. Maybe I can have him on the site in the coming months…
Tawcan interviewed some fellow Vancouverites who retired early.
Early retiree Tanja Hester wrote about blogging less and embracing some new life rhythms as she and her husband continue to adjust to a new routine. In reading this article, I suspect this is something that many couples are going to grapple with when it comes to any retirement. The emotional and psychological preparedness that needs to go into retirement at any age is probably more important than the financial part…and it’s not talked about very much by financial pros at all.
Nice to see Telus increase their dividend this week. We own a few hundred shares and all that dividend income remains tax-free!
Reader question of the week (adapted for site):
Hey Mark,
I relocated to Toronto, Canada a couple of years ago and I’m trying to be tax efficient with my investments as I learn more. Specifically, what are your thoughts to put U.S. equity ETF IVV (you have this in your top U.S. ETF list on this page I know….) in a TFSA or taxable account, if my RRSP is already maxed out (with VYM or SCHD)?
I would just like your point of view on such U.S. ETFs inside the TFSA or taxable account.
Thanks so much and keep up the great work.
Wow, great, detailed tax-efficient question. Savvy investor…
First up, congrats on the maxed out RRSP. That is a significant accomplishment for any investor. I think VYM or SCHD are great funds for both income and growth.
When it comes to tax efficiency, I’ve learned and try to practice the following when it comes to asset location:
- Non-registered account: Canadian dividend paying stocks.
- TFSAs: Canadian dividend paying stocks and Canadian REITs.
- RRSPs: U.S. dividend paying stocks and U.S.-listed ETFs.
Check out this article about taxable investing and what to hold where for tax-efficiency.
In that article, you’ll see that if you hold IVV in a taxable account, that is, a U.S. ETF that pays low-distributions that is rather tax-efficient. Ideally, the most efficient way to hold U.S. assets in a taxable account would be to own U.S. stocks or an ETF that pays no dividends or distributions.
When you hold U.S. stocks (or ETFs) in a non-registered account:
- There is 15% U.S. withholding tax off the top AND
- because U.S. dividends don’t qualify for the Canadian dividend tax credit, you’ll pay tax at your marginal rate on the full amount of the dividend. S. dividends held in a non-registered account are taxed like interest income. So, if you’re going to hold any U.S. assets in a taxable account – hold stocks that pay no dividend and very little dividends or distributions. Thankfully, for U.S. stocks in non-registered accounts, you get a credit for the amount withheld when you file your tax return. This credit can be applied against Canadian income taxes so in most cases that leaves you square—providing your Canadian tax rate is at least 15%.
So, should you own IVV inside your TFSA or taxable account?
I can’t tell you but what you’ll have to decide is if you want to forgo the 15% U.S. withholding taxes inside your TFSA to own IVV (likely lower than your tax rate right now?) or apply for the foreign tax credit every year you own IVV in a taxable account, since it is efficient there in the first place.
All the best and thanks for being a fan of the site. I encourage you to tell others about it!
Happy investing,
Mark
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Have a great weekend!
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
“Nice to see Telus increase their dividend this week. We own a few hundred shares and all that dividend income remains tax-free!”
Hi Mark; Just how do you not pay tax on this dividend income? How is it sheltered? — OR is it in a registered account and I somehow missed that part?
Yup. Hundreds of shares of Telus inside TFSA – tax-free dividend income compounding away 🙂
Thanks so much for the mention, Mark! Home ownership is a great reason for a slower path to FI, especially if it’s important to you and your family. Always enjoy the weekend reads. ?
Thanks for the social support and keep up the good work on your slow FI path!
Mark
Same here. Definitely slow FI for me. We have bought two brand new cars this year due to different reasons. And I am planning an Italy trip for next spring break. I am not sure if I could still call myself frugal? But we really don’t buy any luxury things and try to spend money for good value.
I think ultimately we want to have an enjoyable life. FI is just a path to be there, not the ultimate target by itself.
May ,
my wife had breast cancer in 2014 at age of 38 thank God she’s a survival but you know that was a wakeup call for me that the people who you cherish the most can leave at any moment so all the frugality and money in the world won’t replace my family , yeah like you said and i believe balance in everything is the way to go .
Very well said Gus. Balance is everything.
Mark
Hi, Gus, must be such a relief for you and your wife. I have friends and coworkers going through exactly the same event. Yes, we need to enjoy life now, not on expense of our future. But noway we should sacrifice everything only for the future as nobody has the crystal ball.
Another great comment. So glad she is doing well Gus.
Good point Gus. Nice to read your wife is doing well.
Health truly is the most important thing and being able to find that balance for living today and being prudent for the future is ideal.
As we have now graduated into our 60’s and retired we are also becoming even more aware of not taking our time for granted.
Well said RBull. Good to hear from you!
Thanks. I’m back!
…and I think that’s all that matters May. It’s your life and you need to ensure you are enjoying it the fullest.
Great article Mark ,
as for FI or a slow FI to be honest personally i don’t have a set date or year for that although with two rental properties and a good size portfolio of stocks and bonds and the wife with a db pension i know we can achieve it but there’s no way that we will cut down on things that we enjoy now and not 10 or 15 years from now like travel for example , i just got the ” Millionaire teacher” book last week ( i know maybe I’m late for reading this book ) what an amazing book and Author but to be honest to go through what he did experience of extreme frugality when he was single in order to save and invest that’s something not for everyone for sure , at the end of the day our tomorrow is not guaranteed and YES we want to retire comfortably and happy but we also want to enjoy life as well now and not in 15 years .
I think everything in our life should be balanced not only my portfolio 🙂 so yeah i believe we shouldn’t be to stressed about it just enjoy the ride till we get there .
Andrew’s book is very well done, big fan, but you’re right in that not everyone can or would ever wish to do what he did in terms of extreme frugality.
Great points about enjoying the ride and journey. Life can be short. Need to enjoy it.
Like you home ownership is important to us. We could have been a lot closer to our FI goal had we cut everything and not moved, but we would not have been happy. We decided to move into a better home for our growing family and are much happier. For us it’s not about a race to FI it’s about making smart choices and enjoying the journey. LOVE the idea of SlowFI.
Thanks a lot for the BIG ERN blog reference. After reading it, I AM really scared. Feel like I am nowhere near ready to retire yet while a bear is around the corner.
As cannew already proved by his own experience, I do assume dividend growth strategy and being able to live off dividends makes people less afraid of bear market? Still, I think I will not be brave enough to hold 100% equity. Most likely I will go a glide path like what RBull is doing.
The Big ERN is not wrong. Some troughs have been up to ~ 6 years. That’s a long time. And it could happen again.
“But it takes another 4 years to just get back to the old peak! That means your portfolio was underwater for more than 6 years.”
But I wouldn’t fear everything…
“In other words, just to keep up with the withdrawals from the cash bucket, my equity portfolio has to work much harder than 0% for 7 years. You need about a 5% return after CPI inflation!”
Although 5% after inflation might seem like a challenge, it is significantly enabled by living with more stocks/higher % of equities as you get older.
So, the key solutions based on my understanding of riding out an extensive bear market:
1. Go with higher % of equities as you age (i.e., start retirement with at least 60% if not 70% equities), with
2. A cash wedge or buffer of 1 or better still 2 years of living expenses/fixed income to draw from whereby you wouldn’t need to touch equities at all if absolutely needed, with
3. Go with a lower SWR than 4%, go with 3% if you can (i.e., cut back living expenses and discretionary spending), with
4. Diversification into income-producing assets (e.g., real estate, REITs) so you can spend the dividends/distributions only if needed.
The reality is, there is no real solution to the sequence of return risk problem. At least that I know of!
Thoughts May?
Hi, Mark, I have always thought your plan for retirement is too conservative, after reading through BIG ERN’s series on safe withdrawal rate, I think your plan is recession-proof. You don’t need to be afraid as I am sure you can survive the worst scenario.
I actually didn’t have a solid plan yet, just thinking about all the possibilities and get myself ready. I think I might need to change my definition of ready now being scared of a bear market.
As you know I was late to become aware of how important to invest properly. I began my journal at the end of the year 2017. At that time my plan is to retire in five years and I have a magic number. While I am approaching that number, I am thinking maybe retire earlier than the original five plan. The reason for that is not only financially, but also because both of us are quite tiring due to taking care of young kids while doing fulltime demanding work.
My own job has the part I enjoy and the part stresses me. I recently negotiated with my boss to make my job less stressful. So I think at the least we could stick to my original plan for both of us working another three years. At that time, my withdrawal rate should be in the range of 3.25%~3.5% which is much safer than 4% if things go as it does now.
What about the bear market comes in next three years? Well, I actually would welcome that. Being afraid of a bear market is basically being afraid of sequence risk. I will base my assessment of readiness at the time of retirement. If that time is a time where the market is down 40% from the current point and I still have the number correct, I will be more confident.
And I will practice all the tips you mentioned too: glide path, cash wedge, flexible with expenses and try to live off investment income only when time is bad. If things get really really bad, one thing I am also considering to do is borrowing from my heloc for living expenses instead of selling shares at the bottom of the market. I am pretty sure if that happens, the return from the market will be much higher than the interest on my heloc. At the bottom of a bear market, normally interest rate would be on the bottom too.
I hope it’s recession-proof but I really don’t know…I guess I will find out eventually?
I figure the $1 M portfolio with a dividend income or distribution focus is good because I can spend the capital as I please in “good times” and spend the dividends/distributions in bad times or at least as part of normal living expenses.
I figure this type of portfolio will also have some growth, to fight inflation over time.
I figure the cash wedge ~ $50k will be great for emergencies when they happen and I won’t need to sell assets to recover.
Lastly, I believe my small workplace pension will be very bond-like eventually and I can take some equity risks with my personal portfolio (i.e., more equities than bonds).
Is the plan going to work? I have no idea but I think it’s a good start that will need to be refined over time.
It sure seems recession proof and should have growth over time. You’ve listed the reasons and shown options for flexibility. Not listed is an interest in working PT on your terms. That’s another great back up.
You’re currently tracking well to plan and attuned to refinements as required. All very good! Welll done to date.
One question to be determined: IIRC plans are to spend dividends from TFSAs. Or perhaps this is simply for tracking of income generated purposes. I wonder if you will do this or simply increase withdrawals from registered as needed and let TFSAs grow. My path.
I hope so. I really don’t know RBull. Being honest! I do feel my approach to “live off dividends” (based on history at least) should be good given:
-I can rely on just dividends to fund any expenses and not any gains or stock or ETF sales
-There should be some growth as well to offset inflation
-In a prolonged, terrible market, I can hopefully just cut spending
-Even if some dividends are cut, I’ll still have some ETF distributions to pay for living expenses (although they might be lower as well)
-I’ll have a ~ $50k cash wedge as a buffer to ride through 1-year of spending/expenses
A few more things/benefits as well….
I absolutely plan to start semi-retirement while working, such that, some of my living expenses will be covered by part-time work and I do not need to draw down my portfolio at all in years 1-5 of semi-retirement. That’s my thinking…
I’m not “there” yet in terms of TFSA withdrawals. Part of me thinks I should keep those accounts “until the end” and in other cases, maybe I should draw on them in the coming years early so I can minimize taxation on RRSP withdrawals. I need to run a few scenarios.
I do know my thinking has always been if I can earn $30 k per year from non-reg + TFSAs (x2), then with my RRSP, I will have at least some great options to consider since the sum of income from those accounts (without pension or CPP or OAS) will be enough income to start part-time work.
Hopefully in coming years…
-non-reg. ~ $15k per year in dividend income
-x2 TFSAs ~ $15k per year in dividend income total or $7,500 each (tax-free)
-x2 RRSPs ~ $15k per year in dividend income each (tax-deferred)
Then part-time work covers either non-TFSA withdrawals and/or part-time work covers other expenses and I can draw down RRSPs in 50s and 60s and keep TFSAs maxed and growing. Really not sure yet!
Might run some numbers using some software scenarios and review by a friend who is a fee-only planner.
Those are some nice target numbers in early retirement without considering registered withdrawals, work income and future DB, DC pensions. The bottom line for you is you’ll have CHOICES….and some very good ones! It’s a ways out but if you can easily run some numbers it can’t hurt.
Being honest here too…..there is no absolute certainty in any plan. Lots of factors and unknowns.
However, I’ve been on here nearly 5 years and I have yet to recall a credible post showing your plan as flawed, let alone touting a better one.
I’ve decided to keep funding TFSAs as well as some to unregistered from registered and from my cash wedge. How long on doing this vs when they will be tapped is TBD. My guess is ~ 10-15 yrs. Our registered accts are still larger than when we retired and need to knock these down more before govt benefits start and later RRIF, plus considering potential future tax obligations etc. Anytime I run those numbers it comes with similar outcomes and suggested paths. What we’re on. Definitely not perfect but we’re making out ok.
I guess so… re: “Anytime I run those numbers it comes with similar outcomes and suggested paths. What we’re on. Definitely not perfect but we’re making out ok.”
I might see if my friends at Cascades will let me run another free trial and I can share the results on my site and do an interview with them. I’ll reach out to them in the coming week and see what they say.
Thanks for the kind words. Choices are good and I know if we can live off part-time work + our portfolio in our 50s (without any pension (x2) or future CPP and OAS (also x2 each)), I know our plan is rock-solid.
It just seems smart to withdraw from RRSP first, use that for living expenses + continue to fund TFSAs for as long as we can. I would like to hear otherwise but that is likely our approach and I’ll share that in my next financial freedom post.
You’re welcome.
Sounds good with Cascades. I’m sure many readers would get some decent insight and it might be beneficial for them.
Well I’ve only been back a couple of days and I hope others aren’t tired of my posts yet. lol
All good with me. Drop me a line and let me know how your trip was!
Hi May.
I’m back from Europe.
Yes, I’m still sold on the glide path. ERN confirms the reading I’ve done by Kites & Pfau who document it can be a good plan for those willing to do some amount of DIY to manage it.
I was 95-100% equity (large emergency fund) until about ~3 yrs before retiring when I began moving to approx 50% at retirement start. Arguably a very conservative position to start retirement. Since then – 5.5 years later we are now at 66-67% equities with most withdrawals from dividends, interest, cash and a relatively small amount of equities sold about 15 mths ago. Interest rates seem even more determined now to stay low forever but who knows? I would probably be comfortable getting to about 80% equity over the next ~5 yrs. That will depend on markets, and what’s needed from FI to rebalance, and accounting for our withdrawals
.
When people speak of SWR its hard to pin point if they’re speaking of percentage rates of initial balance (traditionally & likely) or of updated annual balances. Our avg. withdrawal over about 6 yrs has been 3.257% of initial retirement assets. We now have approx 32% more assets than at initial retirement. I prefer to utilitize VPW as a loose guide, which has now been updated to include income from other sources (pensions) to give you an excellent overall picture and guidance. So it will suggest higher withdrawal rates/amounts if before collecting available pensions and then adjust withdrawals lower when more income is generated from them. We have been under VPW suggestions so far including this yr, with a significantly higher withdrawal (home repairs and we kept traveling) and is about 63% of suggested withdrawal. This is also a fair bit less than the required flexibility amount shown in the event of a 50% market drop. So it seems we’re living conservatively so far. Less than investment income generated. I keep saying at some point that will change. But then a big market drop might scare us even if the income continues. Something strange about that but old habits may die hard.
I’ll also add that rather than fixate on allocation %’s I like to look at # of years we can sustain current living utilizing FI withdrawals and not touching equity (we have about 10 currently, not factoring in the addition of future OAS & CPP), and also having a significant amount of discretionary spending to haul back on in the event of needing to for a number of years. A precaution but who knows what will happen.
YMMV
FWIW, hope this gives you or others a little more insight and ideas.
ERN is a smart dude (I had a good chat with him in line for some drinks at the conference one night) and he’s convinced I believe on the equity glide path. I think (?) he’s on record to say that you should start retirement at 60%+ equities and keep going up from there.
I have a post planned about Pfau in the coming weeks…I have some ideas 🙂
Kites has done some great effort in this area as well…
In order for me to “live off dividends” I believe I need close to 100% equities at time of semi-retirement (excluding cash wedge of ~ $50k). That’s the plan. We hope to start saving for our cash wedge in 2020.
Given demographic shifts that include no income from bonds, I don’t see any value in bonds for the next 20+ years other than shock-absorption-tactics from falling equities. Even then, it is prudent to invest in dividend-paying equities or modest distribution ETFs (e.g., VYM or others in my U.S. ETFs list).
As for SWR I think it varies greatly from person to person.
“Our avg. withdrawal over about 6 yrs has been 3.257% of initial retirement assets. We now have approx 32% more assets than at initial retirement.”
That’s wild…
I think you’re smart to live on less than you need now. You can always ramp up a bit of spending in your coming years as you take on CPP and OAS as fixed income.
Very good insights into what is working well for you…
I had a good look through ERN’s site. Smart is an understatement. I would agree for someone who isn’t too risk adverse and actually needs/desires more than just inflation plus a bit 60% (many) might be a good starting point. No regrets here however on what I did. No one could predict this long a bull market.
Great about Pfau. I have followed his stuff for 4+ years now. Looking forward to that from your site.
You’re very smart to know what you want and what will work. Mine was a little more trial and error but IMHO my hunch for starting conservative with a rising equity path was the right choice for us. It’s “likely” true about bonds holding low value beyond a shock absorber, but I know deeply things change especially when we don’t think they will. I generally believe in more equities in retirement but have also been through the experience of losing a large amount of assets (on paper) concurrent with original planned retirement date, when I was no longer saving, and I can attest to it being a very ugly feeling. Many people without that experience “may” be shocked when it happens, let alone be in retirement mode or close to it. I remain wary and as you know also consider my “need” to take risk, but concentrate more on steady income from investments and my wifes work pension.
“Wild”. lol. I don’t take credit. Luck, my friend. Hopefully it remains for some years for both of us.
Thanks. Yes we can move up or down in spending fairly easily and life will still be good.
Glad you think that. If someone learns what to do or not to do from someone else that’s great in my book.
Thanks a lot RBull for your insight and your real retirement experience. So nice to have 32% more assets after so many years of retirement. You really need to bump up your expense but that’s a nice problem to have. I think another nice problem you might have is that you could have OAS clawback if you don’t spend money fast enough.
It’s a good idea to measure if FI allocation enough by # of years of expenses. I think I should be comfortable enough if I have 10 years of annual expenses in FI. It will for sure last longer than that considering investment income should be able to cover a big part of the expenses. In this sense, I think I will keep 40% of my original retirement magic number as FI. Once I achieved that number, I will put everything extra in equities.
I guess personal finance plan before and in retirement will be in continuous change and adjustment. It’s just like our life. Life changes and our plan changes accordingly. We just need to be always agile.
You’re welcome May. We’ve been fortunate so far like many others on here.
Well we’re probably fine for now on spending at least until we get a taste of the next downturn. It’s a potential issue on a small amount of OAS clawback but with full income splitting available for us I think we’ll very likely we’ll stay under, unless market stay very healthy. Yes, a nice problem if a person does run into it.
10 years now, but very likely to decrease over time to maybe half.
I think you’ve got the right idea and have the benefit of being on here and doing a lot of homework. I didn’t discover Marks site until after I retired!
I totally agree there will always be continuous change, adjustment etc. The only successful creatures on earth were those able to adapt. Dinosaurs….no. People able to adapt will always be happier and more successful.
Good luck.
Dividend increases, increase ones yield on their total investments without doing anything which in turn increase your income. One step in achieving financial independence.