Here are my posts for this week: RRIF Withdrawal Rates do not have to Rule Your Life RRIF Minimum Withdrawals are Designed for a 6% Real Return Here are some short takes and some weekend reading: Charles Rotblut interviews John Bogle (founder of Vanguard) about index funds, ETFs, and more. Bogle has a great way of explaining important investing concepts very clearly. The Blunt Bean Counter makes some interesting observations about the different types of people who are expecting an inheritance. They range from decent people to the despicable. Life Insurance Canada says that it’s hard to deal with insurance companies that sell directly online without an insurance broker. We can be justified in being suspicious of the opinion of a broker who doesn’t like companies that don’t use brokers, but the experiences described seem genuine. Million Dollar Journey has the story of 29-year old Sean Cooper who has amassed a net worth of $500,000. Many would find his measures extr...

Note that this post was written before the RRIF minimum withdrawal percentages were reduced.  Later, I wrote a similar post examining the new RRIF percentages . Did you ever wonder where the magic RRIF minimum withdrawal percentages came from? I may have figured it out by accident. I was creating a chart to show that these minimum withdrawals will deplete RRIFs over time and that yearly payments would very likely decrease over time. Then I came across an amazing coincidence. I set out to find out how RRIF payments would change over time if the investments make a steady real return. “Real return” means the return above inflation. So, if the return is inflation+3% every year, what will your inflation-adjusted RRIF minimum withdrawals look like? I calculated this for real returns from 0% to 6%. The following chart shows the results. Keep in mind that the incomes are inflation adjusted. So, the chart shows how your purchasing power changes over time. The first thing ...

A very persistent myth is that retirees are forced to overspend their retirement nest eggs because forced RRIF withdrawals are so high. I get numerous comments to this effect on my articles, and other writers call on the government to reduce forced RRIF withdrawals. There is a simple remedy: Don’t spend all the RRIF withdrawal that lands in your chequing account. This story begins with the 4% rule of thumb that many people use for retirement income. The idea is that when you enter retirement, you calculate 4% of your starting savings amount as a withdrawal for the first year. Then you increase this withdrawal by inflation every year. So the 4% amount applies only to your level of savings on day one of your retirement. There are a number of problems with the 4% rule as I explained in a post on a retirement income strategy . One serious problem is that the original research that led to the 4% rule assumes that you pay no investment fees. I showed that the safe withdrawal rat...

I wrote only one post this week: Which is the best credit card? Here are some short takes and some weekend reading: Norman Rothery points out that the 4 per cent rule for retirement withdrawals each year is based on the assumption that you pay no investment fees. This fact is rarely mentioned. I recreated the study behind the 4 per cent rule and then studied the effect of fees . Boomer and Echo have a thoughtful list of 5 investing lessons learned. To the first lesson I‘d add that distinguishing skill from luck goes beyond comparing returns to an appropriate benchmark. Even if you beat a benchmark over a year or five, you may have been just lucky and have no expectation of beating the benchmark in the future. Rob Carrick says “don’t sell your stocks if you’re worried about a market decline.” That’s good advice, and the second paragraph has a good lesson as well: “The market will fall at some point, but it’s pointless for most investors to try and predict when.” Howev...

The one with no balance. <rant> I know some bloggers make a lot of money with credit card referrals, but enough already. I just don’t care which credit card is best. As long as I don’t carry a balance, don’t pay a yearly fee, don’t pay for any idiotic insurance, and get a little cash back, the rest is small stuff. Find a way to cut back on some spending that isn’t improving your life much and you’ll come out much further ahead than picking some whiz-bang credit card. The only exception I can think of is if you can use a personal credit card for work costs such as travel, get reimbursed and get to keep credit card rewards. Outside of that, all the excited talk about choosing credit cards is just a big yawn. </rant>

Here are my posts for this week: Stock Volatility Grows Slower than Expected Low Inflation Makes Mortgages Riskier Here are some short takes and some weekend reading: Elon Musk takes the remarkable step of allowing competitors to use inventions in Tesla Motors’ patents . His reasoning for doing this includes an accurate indictment of the current patent system. Canadian Couch Potato proposes a way to estimate expected future stock and bond returns. John Heinzl brings us a very interesting interview about financial fraud. Stan Buell is a victim himself and knows a lot about how others are victimized. Steadyhand has a chart that puts our current interest rates into historical context. Jason Zweig shares some sensible thoughts on dividend investing. Million Dollar Journey answers the question of how much money you need to save monthly to reach your target retirement number. Big Cajun Man isn’t a fan of selling leverage to widows.

One of the ways that pressure on home-buyers can drop over time is that inflation erodes the purchasing power of mortgage payments. However, this pressure valve is less effective with today’s low inflation. Imagine a young couple taking on a 25-year $250,000 mortgage. Today, they might pay a mortgage rate of 3.5% and expect 2% inflation. Imagine a 2% increase in both (5.5% mortgage rate and 4% inflation). How does that change the financial pressure on our couple? In the first scenario, the mortgage payment is $1244/month, and in the second scenario the payment is $1515/month. But this only tells part of the story. The following chart shows how these payments change over time when we adjust for inflation. In the first scenario, the purchasing power of the mortgage payments drops by 39% over 25 years. In the second scenario, the purchasing power of the mortgage payments drops by 62% over 25 years. While the first couple starts with lower payments, the pressure of these ...

It is well-known that stock returns do not follow the normal distribution that is commonly used to analyze returns. Less well known is that the returns from one year to the next are not independent; there are small correlations. A consequence of these correlations is that the riskiness of stocks grows slower than simple models predict. Jeremy Siegel made this observation in his book Stocks for the Long Run . I found this result so remarkable that I decided to investigate myself. I grabbed Robert Shiller’s historical U.S. stock returns and made some calculations. Over the past 100 years, U.S. stock market returns have had a standard deviation of 19.0%. If the returns of each year were independent of each other, we’d expect this standard deviation to grow by the square root of the number of years. So, after 25 years, we expect the standard deviation of total returns to be 5 times higher, or 95%*. For each time period from 1 to 40 years, I calculated the standard deviation o...

Here are my posts for this week: A Financial Quiz Currency Exchange using Royal Bank Stock Here are some short takes and some weekend reading: Frugal Trader at Million Dollar Journey has completed his journey and is now a millionaire. Welcome to the club. He’s looking for reader input on what to focus on next. For my own finances, I’ve been focusing lately on how much my savings could pay me per month for the rest of my life (rising with inflation) and what fraction of my current spending that represents. I’ll declare myself financially independent when this reaches 100%. Canadian Couch Potato explains the various ways your assets are protected from the failure of a financial institution. Larry MacDonald says that housing bears have been wrong for 6 years and that predicting short-term housing prices is very difficult. I agree. I’d be willing to make a modest wager that Canadian housing will underperform its long-term average appreciation over the next decade. But...

In the past I’ve used the exchange-traded fund DLR to make cheap currency exchanges at InvestorLine . I decided to try Royal Bank stock (ticker: RY in both Canada and the U.S.) because it has a smaller spread to save me more money and it’s easier to trade. For those not familiar with the Norbert Gambit for saving money on currency exchanges, please take a look at Canadian Couch Potato’s excellent guide . The lowest risk method of doing the Norbert Gambit is to use the exchange-traded fund DLR which just holds U.S. dollars and can be bought and sold in either Canadian or U.S. dollars. Unfortunately, you can’t buy or sell the U.S. dollar version online at InvestorLine; you have to call an agent, which is a pain. So, I decided to try using Royal Bank stock instead. With my new savings always in Canadian dollars, my portfolio allocation tends to get out of balance by having too much in Canadian ETFs. I needed to sell about $60,000 worth of Canadian ETFs, change currency to U.S. do...

I enjoy taking financial quizzes, even the type that ask dumb questions like “is taking a vacation financially irresponsible?” Of course, the answer is “it depends,” and people get to argue about it pointlessly. I have a very short quiz with more objective answers. 1. Siblings Amy and Brad inherited $50,000 and contributed the money to their RRSPs. Amy invests her money in North American stock index ETFs with low fees. Brad chooses his favourite 5 stocks each year and invests all his money in them. If Brad’s choices are essentially random, what is the probability that he will have less money than Amy after 40 years? A) Less than 50%. B) 50% C) More than 50%. 2. A third sibling, Charlie, also received $50,000 and put it in his RRSP. Charlie decides each month which way the stock market is going and either invests fully in North American low-cost stock index ETFs or he parks it in short-term government debt. What fraction of the time does Charlie have to guess right for hi...