Tuesday, October 26, 2021

Will Your Nest Egg Last if You Retire Today?

If you’re thinking of retiring today on your own savings rather than a guaranteed pension, how do you factor in the possibility of a stock market crash?  If you’re like many people, you just hope that stocks will keep ticking along with at least average returns.  However, this isn’t the way I thought about timing my own retirement.

I retired in mid 2017.  At the time, stock prices were high, so I assumed that the day after retiring, the stock market would drop about 25% or so, and then it would produce slightly below average returns thereafter.  By some people’s estimations, I over-saved, but I didn’t want to end up running out of money in my 70s and be forced to find work at a tiny fraction of my former pay.

What actually happened in the 4+ years since I retired was the opposite of a stock market crash.  My stocks have risen a total of 60% (11.5% compounded annually when measured in Canadian dollars).  If I had known what was going to happen, I could have retired much sooner.  But I didn’t know, so I have no regrets.  It’s better to have too much than too little.

If you want to retire today, you face an even worse dilemma than I did because stock prices are much higher than they were when I retired.  If I were retiring today, I’d factor in at least a 40% drop in stock prices the day after I left my job.  This isn’t a prediction; it just represents the possibility that stock prices could return to more normal levels in the coming years.

For many prospective retirees, thinking this way means they will have to save substantially more before they can retire, so this is very unwelcome news.  But simply hoping stocks keep climbing could lead to a meagre retirement if markets crash in the near future.

As usual, those who think the way I do and are already over-saving will believe this line of thinking.  Those who want to retire sooner on rosy stock market predictions will dismiss my thoughts.  In most markets, optimistic retirees fare reasonably well, but with stock prices at nosebleed levels, there is the possibility that optimists will be very disappointed.

Friday, October 22, 2021

Short Takes: Dividend Nonsense, Lingering Beliefs, and more

Recently, I saw another example of magical beliefs about dividends.  Nick Maggiulli makes the claim that the bulk of investor returns over time come from reinvested dividends.  In one 40-year example, the total return is 791% without reinvested dividends and 2417% with reinvested dividends.  Unsaid is that if you withdrew all price gains periodically (and thereby failed to reinvest them), the total return from just dividends would be far less than 791%.  

This isn’t hard to understand when you look at the situation clearly.  Suppose that over several decades dividends are responsible for doubling your investments twice, and capital gains are responsible for doubling your investments three times.  So, dividends alone would have given a 300% return, and capital gains alone would have given a 700% return.  But through the magic of compounding, reinvesting all returns gives five investment doublings, or a 3100% return.  

Dividend lovers like to compare the 3100% to the 700% and declare that the bulk of long-term returns come from dividends.  This is nonsense.  It would also be nonsense to compare the 3100% to the 300% and declare that the bulk of long-term gains come from capital gains.  The relative value of these two types of return is best viewed by looking at the doublings.  In this example, dividends are responsible for 40% of returns and capital gains 60%.  Clearly, both matter.

Here are some short takes and some weekend reading:

Morgan Housel
makes a strong case that our beliefs about the world can linger on while reality changes.  His best example is the changing demographics in China.  They are feeling the effects of their former one-child policy.

Doug Hoyes explains how people seeking debt relief with consumer proposals get scammed if they go to the wrong organization.

Justin Bender explains in detail how to track the Adjusted Cost Base (ACB) of asset allocation ETFs held in non-registered (taxable) accounts.

Robb Engen reviews Fred Vettese’s new book The Rule of 30.  Robb persuaded me to add this book to my reading list.

Friday, October 8, 2021

Short Takes: RRSP Withdrawals in Your 60s, Comparing Global Stock ETFs, and more

Here are my posts for the past two weeks:

Class Action Settlement with BMO

The Deficit Myth - Modern Monetary Theory

Here are some short takes and some weekend reading:

Jason Heath looks at reasons why it can make sense to withdraw from your RRSP in your 60s.  In my case, my simulations showed that it made sense to start withdrawing from my RRSPs shortly after retiring in my 50s.  This is true even though I have non-registered assets I could be living on right now.  The reason is that I’m best off spreading out the taxable income from RRSP withdrawals over many years.

Justin Bender compares the two main global except Canada stock ETFs: VXC and XAW.

Big Cajun Man is closing his TD mutual fund accounts after TD’s latest attempt to steer its customers away from its excellent e-series funds and toward their crappy high cost funds.

The Blunt Bean Counter
explains the implications of getting an inheritance.