HOW MUCH TO SPEND WHILE RETIRED = STRESS AND CONFUSION

HOW MUCH TO SPEND WHILE RETIRED = STRESS AND CONFUSION

Fred Vettese, chief actuary of Morneau Shepell has written another piece in Benefits Canada that talks about the decumulation phase of  retirement. That is, when you start to spend down your retirement savings.  It can be a very stressful time for people who worry constantly about outliving their money.  This leads many to be overly anxious and probably spend less than possible.

http://www.benefitscanada.com/pensions/governance-law/employers-and-government-need-to-step-up-to-address-decumulation-dilemma-92539

Employers, government must step up to address decumulation dilemma

Fred Vettese | January 13, 2017

It’s a little shocking to realize that 1,100 Canadians are turning 65 every day. Of that number, about 500 will be relying on their own savings for much of their retirement income security (the rest are defined benefit participants or low-income workers). Unfortunately, very few of them are qualified to implement an efficient decumulation strategy on their own. The simple reason is that decumulation is a lot more complicated than it looks.

A 65-year-old couple with $500,000 in tax-sheltered savings could do everything right (if adhering to orthodox retirement planning principles is deemed to be right) and still run out of money by age 75. Alternatively, they could have used a more modern decumulation strategy – one only academics and a select group of actuaries seem to be aware of – and have enough money to live comfortably into their 90s, even if their investment results were no better.

Of course, retirees can and do seek out help from financial advisors but judging from the emails I receive from readers that might not be doing them much good. The interests of commission-based advisors are not well aligned with those of retirees. It’s not just a matter of which investment funds an advisor might recommend (each fund pays a different trailer fee), it’s also a question of whether the advisor is ready to recommend certain risk-mitigation strategies that will drastically reduce his or her compensation going forward.

Two major stakeholders have the ability to help new retirees but have done little so far. One of them is employers that sponsor capital accumulation plans. I suggested to my insurance company friends that we should mobilize this group to do more. They told me this would be a challenge since few employers want to remain involved with plan participants once they’ve retired, preferring instead to see retiring participants transfer their monies out of workplace plans as soon as possible. This is a shame because employers can provide low-cost decumulation options within their plans. Moreover, they have ready access to objective retirement experts who can devise more effective decumulation strategies.

It should be noted that virtually all such employers are companies in the private sector, companies that should remember why they sponsor a pension plan or group registered retirement savings plan in the first place. Most of them want to see their employees retire with dignity, not only because it’s the right thing to do but also because it sends a signal to the active workforce that the company they work for is a good one and deserves their loyalty.

In addition, these companies want to be seen as good corporate citizens because a good public image is good for business. Given this rationale, how does it make sense to support participants in defined contribution pensions during a savings accumulation marathon that can last for 30 years or longer, only to drop them just before they reach the finish line? It’s not good for anyone to see a retiree run out of money at age 75.

The other stakeholder that needs to step up is government. Three provinces still do not allow in-plan decumulation. Notably, Ontario is one of them, which is surprising given its very public concern for the retirement security of Ontarians and given that about 200 of those 500 daily retirees live in the province. To my knowledge, the question of allowing in-plan decumulation is not even on Ontario’s radar at present, even though the government had circulated a consultation paper on the subject a couple of years ago (and which now appears to be gathering dust).

What’s worse, the existing maximum withdrawal rules for defined contribution pension plans may be doing more harm than good in that those rules would preclude some of the more effective decumulation strategies. That particular problem is shared by all provinces.

I should acknowledge that even poor decumulation strategies work fairly well as long as capital markets do well. With the current bull market approaching a record in terms of length, however, that may change sooner rather than later. I have to wonder how many more participants of defined contribution pension plans have to retire with a sub-optimal decumulation strategy before action is taken.

DON’T BUY INDIVIDUAL STOCKS UNLESS YOU’RE WILLING TO DO THIS!

DON’T BUY INDIVIDUAL STOCKS UNLESS YOU’RE WILLING TO DO THIS!

What is “this” that you need to do if you plan on playing the market with anything besides low cost index funds?

“This” is to create a spreadsheet that keeps track of your stock performance relative to the index. I am willing to bet that 95%+ of small investors have no idea whether their stock picks have turned out better or worse than buying the whole index.   They may remember those stocks that doubled but forget the ones that lost 50%.  Or, they forget what they paid for a stock or how long they’ve held it.

How can someone possible know whether they’d be better off buying the whole index if they don’t keep detailed records of how their picks have performed?  If you’re not willing to invest the time and effort, then stick to the index.

Here is what I’ve done and I ‘ll be completely honest with how I’ve fared vs. the index since I paid off the mortgage and finally started to have some money to invest in 2009.

I developed a spreadsheet in Microsoft Excel that records any stock purchases I’ve made including the date of purchase, the dividend yield and the total cost.  Beneath this line, I created similar equations but this time assuming I spend the exact amount of money buying the whole Canadian market.  For this, I use the Ishares XIC index fund.

To finish off the spreadsheet, I created formulas that determine the compound annual growth rate for the my picks vs the whole Canadian market including dividends.

Finally, I compare my performance vs. the XIC etf for each stock and then for my whole portfolio.

This spreadsheet allows me to see which of my picks are beating the market and which ones are lagging.  I also can see how each stocks has performed since purchasing  and how the whole market has performed.

As I already mentioned, I’ve been at it since 2009 in a significant way.  To date, my picks have bested the XIC index by 19% overall.  So in my case, I have 19% more money in my portfolio today because I bought my own stocks vs investing in the XIC.    Not a bad return but I’ve also taken on more risk by running a concentrated portfolio and I’ve spend many hours reading and learning about companies to help me make my decisions.

In the end, if I didn’t enjoy doing the research, I don’t think I would have invested the time and effort to pick individual stocks.  It’s tough to do well and there are no guarantees you will be better off doing it this way vs. indexing.

Indexing is such an amazing creation.  I can see myself moving more and more to indexing as time passes.  Right now I’ve taken a gamble on some oil and gas stocks looking for a big payoff.  When that does or doesn’t pan out, I may decide to call it quits and go 100% index.

Remember that I have a teacher pension plan with 25 year of service.  If I was responsible for my own retirement money, I would be 100% index funds, no doubt about it.

HOW MUCH TO SPEND WHILE RETIRED = STRESS AND CONFUSION

HOW MUCH TO SPEND WHILE RETIRED = STRESS AND CONFUSION



Fred Vettese, chief actuary of Morneau Shepell has written another piece in Benefits Canada that talks about the decumulation phase of  retirement. That is, when you start to spend down your retirement savings.  It can be a very stressful time for people who worry constantly about outliving their money.  This leads many to be overly anxious and probably spend less than possible.

http://www.benefitscanada.com/pensions/governance-law/employers-and-government-need-to-step-up-to-address-decumulation-dilemma-92539



Employers, government must step up to address decumulation dilemma

Fred Vettese | January 13, 2017

It’s a little shocking to realize that 1,100 Canadians are turning 65 every day. Of that number, about 500 will be relying on their own savings for much of their retirement income security (the rest are defined benefit participants or low-income workers). Unfortunately, very few of them are qualified to implement an efficient decumulation strategy on their own. The simple reason is that decumulation is a lot more complicated than it looks.

A 65-year-old couple with $500,000 in tax-sheltered savings could do everything right (if adhering to orthodox retirement planning principles is deemed to be right) and still run out of money by age 75. Alternatively, they could have used a more modern decumulation strategy – one only academics and a select group of actuaries seem to be aware of – and have enough money to live comfortably into their 90s, even if their investment results were no better.

Of course, retirees can and do seek out help from financial advisors but judging from the emails I receive from readers that might not be doing them much good. The interests of commission-based advisors are not well aligned with those of retirees. It’s not just a matter of which investment funds an advisor might recommend (each fund pays a different trailer fee), it’s also a question of whether the advisor is ready to recommend certain risk-mitigation strategies that will drastically reduce his or her compensation going forward.

Two major stakeholders have the ability to help new retirees but have done little so far. One of them is employers that sponsor capital accumulation plans. I suggested to my insurance company friends that we should mobilize this group to do more. They told me this would be a challenge since few employers want to remain involved with plan participants once they’ve retired, preferring instead to see retiring participants transfer their monies out of workplace plans as soon as possible. This is a shame because employers can provide low-cost decumulation options within their plans. Moreover, they have ready access to objective retirement experts who can devise more effective decumulation strategies.

It should be noted that virtually all such employers are companies in the private sector, companies that should remember why they sponsor a pension plan or group registered retirement savings plan in the first place. Most of them want to see their employees retire with dignity, not only because it’s the right thing to do but also because it sends a signal to the active workforce that the company they work for is a good one and deserves their loyalty.

In addition, these companies want to be seen as good corporate citizens because a good public image is good for business. Given this rationale, how does it make sense to support participants in defined contribution pensions during a savings accumulation marathon that can last for 30 years or longer, only to drop them just before they reach the finish line? It’s not good for anyone to see a retiree run out of money at age 75.

The other stakeholder that needs to step up is government. Three provinces still do not allow in-plan decumulation. Notably, Ontario is one of them, which is surprising given its very public concern for the retirement security of Ontarians and given that about 200 of those 500 daily retirees live in the province. To my knowledge, the question of allowing in-plan decumulation is not even on Ontario’s radar at present, even though the government had circulated a consultation paper on the subject a couple of years ago (and which now appears to be gathering dust).

What’s worse, the existing maximum withdrawal rules for defined contribution pension plans may be doing more harm than good in that those rules would preclude some of the more effective decumulation strategies. That particular problem is shared by all provinces.

I should acknowledge that even poor decumulation strategies work fairly well as long as capital markets do well. With the current bull market approaching a record in terms of length, however, that may change sooner rather than later. I have to wonder how many more participants of defined contribution pension plans have to retire with a sub-optimal decumulation strategy before action is taken.

DON’T BUY INDIVIDUAL STOCKS UNLESS YOU’RE WILLING TO DO THIS!

DON’T BUY INDIVIDUAL STOCKS UNLESS YOU’RE WILLING TO DO THIS!



What is “this” that you need to do if you plan on playing the market with anything besides low cost index funds?

“This” is to create a spreadsheet that keeps track of your stock performance relative to the index. I am willing to bet that 95%+ of small investors have no idea whether their stock picks have turned out better or worse than buying the whole index.   They may remember those stocks that doubled but forget the ones that lost 50%.  Or, they forget what they paid for a stock or how long they’ve held it.

How can someone possible know whether they’d be better off buying the whole index if they don’t keep detailed records of how their picks have performed?  If you’re not willing to invest the time and effort, then stick to the index.

Here is what I’ve done and I ‘ll be completely honest with how I’ve fared vs. the index since I paid off the mortgage and finally started to have some money to invest in 2009.

I developed a spreadsheet in Microsoft Excel that records any stock purchases I’ve made including the date of purchase, the dividend yield and the total cost.  Beneath this line, I created similar equations but this time assuming I spend the exact amount of money buying the whole Canadian market.  For this, I use the Ishares XIC index fund.

To finish off the spreadsheet, I created formulas that determine the compound annual growth rate for the my picks vs the whole Canadian market including dividends.

Finally, I compare my performance vs. the XIC etf for each stock and then for my whole portfolio.

This spreadsheet allows me to see which of my picks are beating the market and which ones are lagging.  I also can see how each stocks has performed since purchasing  and how the whole market has performed.

As I already mentioned, I’ve been at it since 2009 in a significant way.  To date, my picks have bested the XIC index by 19% overall.  So in my case, I have 19% more money in my portfolio today because I bought my own stocks vs investing in the XIC.    Not a bad return but I’ve also taken on more risk by running a concentrated portfolio and I’ve spend many hours reading and learning about companies to help me make my decisions.

In the end, if I didn’t enjoy doing the research, I don’t think I would have invested the time and effort to pick individual stocks.  It’s tough to do well and there are no guarantees you will be better off doing it this way vs. indexing.

Indexing is such an amazing creation.  I can see myself moving more and more to indexing as time passes.  Right now I’ve taken a gamble on some oil and gas stocks looking for a big payoff.  When that does or doesn’t pan out, I may decide to call it quits and go 100% index.

Remember that I have a teacher pension plan with 25 year of service.  If I was responsible for my own retirement money, I would be 100% index funds, no doubt about it.

MUTUAL FUNDS SUCK! MORE EVIDENCE

MUTUAL FUNDS SUCK! MORE EVIDENCE

According to the Globe and Mail,

“Not a single Canadian manager investing in U.S. stocks delivered higher returns than the S&P 500 index over that time (past five years), according to S&P Dow Jones Indices.”

Well that’s America, what about Canada?

“The second quarter saw 17 per cent of Canadian large-cap equity fund managers beat the market, which was the lowest rate of outperformance among data going back to 1999”

Do you need any more proof that buying mutual funds is a bad investment?  It’s all about cost.  Mutual funds with fees of 2-3% can’t compete with low cost index funds.

If you want to be a successful investor, you need to ditch the mutual funds, and learn to DIY.  Buying low cost index funds with an advisor is better than mutual funds but it’s still too expensive.  Paying .5% to 1% for index fund advice is still too high.

Happy investing.

http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/canadian-funds-focused-on-us-stocks-struggle-to-beat-the-index/article32357580/

MUTUAL FUNDS SUCK! MORE EVIDENCE

MUTUAL FUNDS SUCK! MORE EVIDENCE

According to the Globe and Mail,

“Not a single Canadian manager investing in U.S. stocks delivered higher returns than the S&P 500 index over that time (past five years), according to S&P Dow Jones Indices.”

Well that’s America, what about Canada?

“The second quarter saw 17 per cent of Canadian large-cap equity fund managers beat the market, which was the lowest rate of outperformance among data going back to 1999”

Do you need any more proof that buying mutual funds is a bad investment?  It’s all about cost.  Mutual funds with fees of 2-3% can’t compete with low cost index funds.

If you want to be a successful investor, you need to ditch the mutual funds, and learn to DIY.  Buying low cost index funds with an advisor is better than mutual funds but it’s still too expensive.  Paying .5% to 1% for index fund advice is still too high.

Happy investing.

http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/canadian-funds-focused-on-us-stocks-struggle-to-beat-the-index/article32357580/

ROBOTS VS. CANADA PENSION PLAN

ROBOTS VS. CANADA PENSION PLAN



Humans are not robots.  They don’t always make rational decisions.  If you don’t believe this then you probably believe that the federal government’s plan to boost Canada Pension Plan (CPP) contributions and payouts doesn’t make sense.  In a perfectly rational world, Canadians will simply reduce their savings elsewhere to balance out the extra contributions they and their employers will make.

In the real world, there are many Canadians who  have not been saving enough for retirement but will be saving more now because they are forced to do so.  They will have a little more money taken off their pay cheques to pay for this increased saving but they will hardly notice.  I really don’t want to get into the pros and cons of forced savings programs like the CPP because there are actually good arguments on both sides of the debate.

What I’d like to focus on instead is the psychological benefits of knowing that you have a pension waiting for you when you retire and how this can actually make you richer over time.  I will use my own financial situation and my experience teaching CPP to new immigrants as examples to prove my point.

My Experience

As many of you know, I am a teacher and I am obligated to contribute 12.5% of my pay to my pension every year I teach.  In return, I am guaranteed a pension of anywhere from 50-60% of my annual salary, depending on how many years I teach (eg.  25 years of teaching to receive 50% pension).

As a result of knowing this pension is waiting for me and it is being managed by some pretty smart people, I have become more willing to take on more risk with my other investing, have felt confident enough to consume more goods and services than I otherwise would have, and have not panicked and sold my investments in a market downturn.  In fact, I have been a buyer of stocks in every downturn since 2002.  The psychological relief of knowing that my retirement funds are not in jeopardy is huge.

My Teaching Experience

Every year I teach a large group of new immigrants to Canada about CPP and Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).  Almost all my students have low paying jobs and have never heard of any of these programs.  When I ask them what they plan on doing for money when they get older, they have no idea and this causes them stress.  I can see the worry in their eyes because they know how expensive it is to live in a country like Canada (nevertheless, they are so extremely grateful to be here).

Then  I begin explaining each program starting with CPP and ending with GIS with real life calculations that shows what they can expect to earn from these programs starting at age 65.  By the end of the class, there is relief and almost a sense of joy in the class.  They had no idea that by working at even a minimum wage job for 25 or 30 years, they will end up with a decent retirement income.  The knowledge inspires them to go to work and keep working day after day, year after year.  They also understand the value of not working in the underground economy (“for cash”).  That is the value of programs like CPP.

I think boosting CPP payouts will help more people feel less anxiety about growing old.  People cannot stand the unknown.  There are just too many bad things that could happen that can consume our imaginations.  When people are afraid they find ways to reduce their fear like selling stocks in a bear market, keeping more money in cash, and reducing spending on goods and services, etc.  Boosting CPP payments may reduce the urge to make bad investing and spending decisions in times of uncertainty.