Tag Archives: Ed Rempel

When is the 4% rule safe? Interview with Ed Rempel

 

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Today I’m interviewing Ed Rempel for savewithspp.com. Ed has been a Certified Financial Planner for over twenty years, and an accountant for thirty-three years. After building one of the largest financial planning practices in Canada, he partially retired in his fifties to focus on his passion for writing.

On his blog Unconventional Wisdom, Ed recently discussed his very interesting research* which reveals that if you want to withdraw 4% a year from your retirement portfolio without running out of money in 30 years of retirement, you need to hold significantly more equities than bonds in your portfolio. And that’s what we’re going to talk about today. Welcome, Ed.

Thanks a lot Sheryl.

Q: So how do you define a successful retirement for the purposes of your study?
A: For the purpose of the study, I defined a successful retirement as providing a reliable income rising with inflation for 30 years. That means you retire at 65 and your money lasts to age 95.

Q: Many financial planners use the 4% rule, which essentially says that you can withdraw $40,000 a year plus inflation for life from a $1 million portfolio. What do you think?
A: I have 146 years of data on stocks, bonds, cash, and inflation. I looked back at all those years to see what would have happened in the past if people retired that year, with each type of portfolio – e.g 100% bonds, 100% stocks plus various other permutations and combinations. 

I also tested these scenarios with inflation, to see what actually happened in the past. And the surprising result was that the more equities you actually have the safer your portfolio is. My whole blog is about “unconventional wisdom.” I love challenging ideas that most people believe aren’t really true and that’s one of them.

Q: So, to what extent does retirement success link to whether or not retirees follow the common of rule of thumb which suggests that they shouldn’t invest more than 100 minus their age in equities? For example, the portfolio of a 70-year old should include 70% bonds and 30% stocks.
A: We call that the age rule and its one of the things I tested in the study. I found that it actually gives you a significantly lower success rate. If you have 70% bonds at age 70, and the bond allocation is growing as you get older, that’s a very low component of stocks. In these circumstances you will have a much lower retirement success unless you withdraw a lower amount of income each year. 

Q: And what would the lower amount of income be in your view?
A: If you are more comfortable with a conservative 70% bond/30% stock portfolio, I would suggest you use a 3% not a 4% annual withdrawal rate. 

Q: Then what is the stock/bond allocation with the highest success rate, which we defined earlier as having enough money to withdraw 4% annually plus inflation, for thirty years?
A: The highest success rate will result if you are invested 70% or more in stocks. This is a very heavy allocation. And if you plan to withdraw more than 4% (i.e. 5% or 6% annually) the highest success rate will occur if you have 90% or 100% stocks. 

Q: What about bond or GIC investors? What percentage of their accounts can be safely withdrawn so their money will last thirty years?
A: I would suggest bond and GIC investors stick with 2.5%. That’s a little bit more than the interest that they’ll get, so they would be encroaching on their principal.

Q: Many financial advisors tell investors to keep cash equal to two years income, to draw on when their investments are down. Will that improve the possibility that these people won’t run out of money?
A: That is another example of “conventional wisdom” that people subscribe to. And I agree it kind of sounds logical, but my study found that holding two years’ worth of cash will not enhance your chances of making your money last for 30 years. In fact, there were a number of cases where keeping cash actually meant investors ran out of money, when without cash they didn’t.

The only possible benefit would be entirely behavioral. For example, if investments go down some people might get scared and cash them in. However, if they have cash they might leave their investments alone and just spend the cash for a little bit. But in general I don’t recommend this because I like to follow what actually works and I found no actual benefit in holding cash to cover expenses for several years after a market downturn. 

Q: Based on their risk tolerance then, how would you advise clients or readers who are nervous about holding a high percentage of equities in their portfolio?
A: They still need to stay within their risk tolerance. Therefore, even though the study showed a higher amount of equities is safer, and would give them a better retirement, that’s not what I’m recommending that everyone should necessarily do.

Q: So more conservative investors are just going to have to understand they will either need more money to meet their retirement goals or they will have to spend less?
A:
Right. Adding bonds gives you a fixed income that reduces volatility that can make you less nervous. But then you have to lower income expectations. 

Q: Say that somebody does go with a higher stock allocation, what about the risk if there’s a stock market crash early in their retirement? How much will it throw out the calculations?
A: In the study I went back to 146 years, and there were a lot of big market crashes in the last 146 years, to see what actually happened. In actual fact that I found that historically this almost never a factor except in one very clear case for people who retired in 1929. It was actually inflation that eroded buying power over the years.

Q: What’s the biggest mistake people can make if there is a market decline?
A: The biggest mistake, in fact, I call it “the big mistake,” is to sell your investments, like sell your equities or switch to more conservative investments, after a market decline. The bottom line is you must be able to stay within your risk tolerance and stay invested in the market, through the inevitable crashes. That’s the only way you’re going to get the retirement income that you want.

Q: My last question, what is your best advice to retired investors, or investors close to retirement, regarding how to structure their portfolios.
A: Well the bottom line is to have a proper retirement income plan. You have to think through what the lifestyle is you want to have and how much money you need to support it. And then look at how you are comfortable investing and come up with a plan that gives you what you need. There will be trade-offs, but once you make a proper retirement income plan, then you can have a sustainable income throughout the rest of your life.

Thank you Ed! It was a pleasure to chat with you today.

Thanks a lot Sheryl.

*For the full report of Rempel’s research discussed above, see How to Reliably Maximize Your Retirement Income – Is the “4% Rule” Safe?

 

Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

Oct 16: Best from the blogosphere

There is nothing like curling up on the couch to watch a good movie on a chilly, autumn evening. Before you move on to Netflix, here are some great new personal finance videos that will educate and entertain you.

In Money Left on the Table, Kerry Taylor, aka financial writer and blogger Squawkfox is interviewed on the CBC News Network about eligibility for Registered Disability Savings Plans and how to navigate the application process. She says, “There is really limited uptake for this program geared to people with serious, ongoing physical or mental impairment because applying for it is very complicated.”

This video from the Khan Academy clarifies what buying company stock means and clearly identifies the difference between stocks and bonds. The commentator explains, “In the general sense when you buy shares or stock you are essentially becoming a partial or part owner in the company. In contrast, bonds mean you become a lender to the business.”

Accountant and certified financial planner Ed Rempel discusses the meaning of financial independence, the huge difference it makes in your life and what it takes to get there. By helping almost 1000 families put together a financial plan he has gained insights that form the basis of his 6 Steps to Become Financially Independent.

Sean Cooper, blogger and author is interviewed on the Global Morning show about how homeowners will be affected by higher interest rates. Because Cooper paid off his mortgage by age 30 he does not have to worry about the personal impact of these changes. However, he says, “If you are in a variable rate mortgage and rising interest rates are keeping you up at night, it may make sense to lock in right now.”

Planning a vacation? Preet Bannerjee explains the meaning of dynamic currency conversion and why you should always pay in local currency when travelling. When a merchant gives you the option to pay in your home currency and you choose to do so, the process is known as dynamic currency conversion or DCC. You may think you will come out ahead and avoid the 2.5% conversion fee charged by the credit company. But in fact his examples show that credit card companies typically offer a better exchange rate than if the merchant applied DCC and charged customers in their home currency. And some credit cards charge 2.5% on every transaction anyway.


Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

May 22: Best from the blogosphere

By Sheryl Smolkin

It’s that time of the month again. We present a series of personal finance videos for your viewing pleasure.

First of all, don’t miss Kerry K. Taylor aka Squawkfox’s two part TEDx Talk. “What do you collect?” can be viewed above. You can also watch “Is it worth it?” here where she discusses whether you should pay $700 for a Canada Goose coat.

In an interview with Breakfast Television, personal finance expert Lesley-Anne Scorgie puts together a procrastinator’s financial checklist for those who have a hard time getting around to dealing with their money situation.

Rubina Ahmed-Haq discusses survey results that reveal why women should be saving a bigger chunk of their pay cheque in their retirement fund.

Ed Rempel presents “The 6 steps to become financially independent.” This 50 minutes of financial education is based on his experience working with nearly 1,000 families to create detailed, personal plans for their journey to financial independence.

Money After Graduation’s Bridget Casey says the stock market doesn’t have to be scary. She suggests three different types of accounts to help you get started in the stock market, no matter the level of your skill, knowledge, or savings.


Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

May 15: Best from the blogosphere

By Sheryl Smolkin

This week we present an eclectic mix of posts from Canadian money bloggers, some of whom have been posting for years but have not previously been cited in this space.

On HowToSaveMoney.ca, Heather Clarke offers 7 Ways To Declutter Without Spending A Fortune, Instead of buying costly clear lucite boxes, monogrammed fabric bins, or classic wooden divided trays, she says that using a little creativity and a few basic craft supplies you can make attractive, low cost storage solutions. But I’m not very crafty, so I think the two year rule is the best way to minimize clutter — if I haven’t used an item in 24 months, it’s time to get rid of it.

Recently governments in British Columbia and Ontario have enacted new laws to try and cap runaway house prices in some markets. Firecracker and her husband Wanderer who blog on Millenial Revolution are typically in favour of a laissez faire approach. But as reported in Your Thoughts on Government Intervention, the majority of their readers disagree. Of 356 readers who responded to a survey they conducted, 198 believe the government should intervene. And about one-third believe a tax on speculators is the most effective strategy.

Does your financial advisor really ‘deserve’ to be paid? Doris Belland tackles this thorny issue in a recent post on Your Financial Launchpad. She notes that the financial advice industry is undergoing a profound shift in which several economists plus some of the worlds’ most successful investors and Nobel Laureates argue persuasively that the higher fees associated with traditional investment products have a negative effect on investors’ results.

Ed Rempel explains Why he will never own an ETF or index fund. He says that the average fund manager can’t beat the market, but superior fund managers clearly can. Based on his research and investment returns, he believes he has selected All Star Fund Managers who have consistently exceeded the relevant indices. “Performance fee models with a very low base fee give you the low fee advantage of an ETF or index fund – plus a good chance of above index returns,” Rempel concludes.

And finally, on Financial Uproar, Nelson introduces The Too Much House Equation. “We constantly rag on people who buy too many video games or finance vacations, but we cheer people who make a similar mistake with their houses,” he writes. “The fact is the easiest way for the average person with only a small net worth to save more is to cut their fixed expenses, starting with housing.”


Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Jan 9: Best from the blogosphere

By Sheryl Smolkin

Fireworks on Parliament Hill and across the country ushered in Canada’s sesquicentennial or 150th birthday. I’ll never forget babysitting on New Year’s Eve in 1967 and hearing Gordon Lightfoot’s Canadian Railroad Trilogy for the first time. It’s still one of my favourites!

As our contribution to Canada’s big birthday, in this space we will continue to direct you to the best from Canadian personal finance bloggers from coast to coast with an occasional foray south of the border. We hope you will let us know what you like and what we may have missed.

Recently Ed Rempel addressed the perennial question, Should I Delay CPP & OAS Until Age 70? and included some real life examples. While he illustrates that many Canadians can benefit from waiting until age 70 to start their government benefits, he agrees that if you are retired at 65 and have little income other than these two government pensions, you may have no option.

Barry Choi on “Money We Have Have” explores 5 differences between cheap and frugal people. He thinks calling a frugal person cheap is pretty insulting. “Frugal people understand the value of money and are willing to pay when it counts,” Choi says. “On the other hand, cheap people are only looking for ways to save money regardless of how it’s done.”

With credit card bills that reflect holiday excesses hitting mailboxes this month, many of us are looking for ways to save money. Canadian Finance Blog’s Tom Drake breaks down ways to save money both monthly and annually.

Think about your energy use and your water use to figure out ways to save money on your electricity billgas bill and water bill. Two other services that have many opportunities to cut back include the cable bill and cell phone bill.

“Reducing these five bills could easily save you over $100 a month, or more than $1,000 in a year. That’s not too shabby at all,” he notes.

For Alyssa Davies at “Mixed Up Money” an emergency fund (which she calls money to protect your other money) of three months pay is not enough. She has another account called her “comfy couch” for the months she overspends or under-saves.

When Davies wrote the blog she only had $583 in her comfy couch account but that small amount was all it took to make her feel comfortable. She says, “Whenever I need to use some of that money, I simply take it out, and replace the amount the next time I have available funds to do so. If you’re anything like me, you will want to find a magic number that allows you to breath without feeling like a giant horse is sitting on your chest.”

And finally, Retireby40 says he had a terrific 2016 and achieved 9 out of 11 goals. His approach for setting New Years goals is to set achievable objectives; make the goals specific and measurable; and, write them down so he can track his progress. Several of his goals for 2017 include increasing blog income to $36k, redesigning the blog and save $50,000 in tax-advantaged accounts.


Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.