Friday, April 24, 2015

Short Takes: Breaking a Mortgage, Buying Low, and more

Here are my posts for the past two weeks:

Pay Down Your Mortgage or Invest?

Do Dividend Haters Exist?

Here are some short takes and some weekend reading:

Preet Banerjee does an excellent job of simplifying the explanation of the cost of breaking a mortgage in his latest Drawing Conclusions video.

Scott Ronalds at Steadyhand makes an interesting case for buying into Steadyhand’s weakest recent performer as a way to buy low and sell high.

Justin Bender does a thorough analysis of the all-in costs of ETFs of international stocks.

Larry MacDonald summarizes the federal budget.

The Blunt Bean Counter explains the importance of both spouses using the same accountant for income taxes.

Robb Engen at Boomer and Echo explains why he now focuses on total returns rather than just dividends for his future retirement income. I think this is a good idea, but one example cited is risky. If you could guarantee a 5% real return every year for 30 years and you knew you’d live for exactly 30 years, then you could draw a $90,000 per year income (rising with inflation) from starting savings of $1.45 million. However, returns in the early years may be lower than 5% real, you may live longer than 30 years, and average compound returns over 30 years may be below 5% real. The safe withdrawal amount in this case is much less than $90,000.

Big Cajun Man has some tongue-in-cheek advice for finding the right tax-preparer.

My Own Advisor adds some of his own silver and bronze rules after the golden rule of personal finance.

12 comments:

  1. I tried to explain one idea and ended up bungling another. Not the first time. Thanks for the mention!

    ReplyDelete
    Replies
    1. @Robb: I'm with you on the total return focus. I've definitely seen advisors who think 5% or more withdrawal is fine. However, these advisors usually either ignore future inflation or they claim people naturally want to spend less after their 60s. However, the only study I've seen to examine this point found that most people are forced to spend less after their first few years of retirement because their funds are dwindling.

      Delete
    2. What I failed to properly explain was that I don't actually need $90k/yr (that was a pipe dream from a 2010 idea) and, since I have a workplace pension, won't have to rely solely on my investments in retirement. I agree that safe withdrawal is more likely between 3-4% annually.

      Delete
    3. @Robb: That makes sense. I've got the expected CPP and OAS payments for myself and my wife baked into a spreadsheet that calculates my best guess of a safe spending level.

      Delete
    4. Oh man, a 6% withdrawal has a 40% chance of failure over a 30 year period for an all stock portfolio. I sure am hopeful Robb doesn't advise his clients to withdraw all they want from their portfolios.

      Delete
    5. @Anonymous: Robb explained that he didn't intend to advocate such a high withdrawal rate. His income included pension income.

      Delete
    6. I am surprised you wrote at length about an article I had written, but just mentioned the 6% withdrawal rate discussed by Robb in passing. And you took his comment about pension income at face value, when in reality the word pension is not used in the article from Robb. Hence, the article IS advocating a 6% withdrawal rate, any way you look at it (assuming you are an unbiased observer).

      Even if you believe that what I was saying was "dumb", it has no real world repercussions to investors. You have yourself stated that a portfolio of dividend stocks will likely do similar to index funds (within 1% or so difference). So there is not danger to investors ( in your mind according to what you have stated on the site) However, any serious index investor worth their salt knows that a 6% withdrawal rate in retirement has a big chance of failure. Hence, by posting an article about my "silly" article, but not on Robbs "article" you are doing your readers a disservice. ( due to your judgment being clouded, possibly by envy)

      Not sure what your real beef it is with my work, but I am happy that it makes a difference in your life.

      You know, if I manage to anger all index investors in the world, maybe they will be smart enough and pass my article around on their blogs, forums, etc.

      Delete
    7. @DGI: I pointed out that Robb's 6%+ withdrawal rate was unrealistic. He said he agreed. Maybe he had his pension in mind the whole time and maybe he changed his mind. Either way, we seem to agree that withdrawal rates need to be much lower than 6% to be safe. What else is there to say after we apparently now agree?

      The difference between Robb and you is that he sticks to discussing the topic at hand rather than resorting to ad hominem attacks. If I think you are wrong about an important point and I care to write about it, I will. None of this is personal for me. I make a point of reading the writing of those I disagree with. That is how I learned enough to slowly made the switch from stock picking to indexing. The case for indexing is so strong that I don't expect to ever change again, but it's not impossible.

      Delete
  2. Hi Michael
    I would love to see you do an article on what the Time Value of Money will do to unused and future TFSA contribution room now that it is no longer indexed to inflation. I suspect the effects could quite detrimental over 30 years or so...

    Thanks
    Garth

    ReplyDelete
    Replies
    1. @Garth: I'll give it some thought.

      Delete
    2. I am thinking that although there is no cap on the TFSA, that the de-indexing almost acts like one over time....but a lot can change in 20 or 30 years...

      Delete
  3. Given how some of my co-workers choose their tax preparers, maybe not so tongue in cheek, but thanks for the link.

    ReplyDelete