Send Me email updatesRetirementAction.comThis is a free retirement finance education and advocacy blog/website. Sample below some of the more popular posts on retirement planning, personal finance and advocacy (pension reform, longevity insurance, Florida’s discriminatory property taxes, financial industry renewal) to get a sense of the breadth/depth of the topics. Peter Benedek, CFA Contact Hot Off the WebHot Off the Web-October 22, 2015: Pensions and Retirement Income (incl. Nortel’s Canadian pension update) Contents: Nortel pension, USSteel/Stelco reaffirms no protection in Canada, ORPP or CPP-all the eggs in one basket? actuarial delusions? target-date funds glide-paths, Vanguard:10 year 60/40 portfolio expected return 3-5% real, income replacement ratio not target metric, fiduciary? longevity annuities-good, tontines-interesting… Continue reading Hot Off the Web- September 1, 2015 Contents: ETFs disconnect from underlying, capturing long-term equity risk premium (ERP) comes with inevitable occasional “horrifying short-term losses”, Fidelity IRAs provide Qualified Longevity Annuity Contract (QLAC) option (why not in Canada?), indexing perspectives: providers/bond and stock indexes/indexes for benchmarks vs. portfolio construction/, pre-mortem before the next inevitable 50% market drop. Continue reading…. |
Recent PostsSpending and risk tolerance in retirement: How much can I spend in retirement? Outliving retirement savings is a persistent worry of retirees. This tool was developed to answer the “How much you can spend each year without running out of money?” question based on givens, 8 criteria derived for bounding maximum and minimum stock allocations, controllables and conservative assumptions for uncontrollables. The tool takes an adaptive approach to spending and risk that can be re-run annually and/or following adverse market/spending events to reflect current reality; each year is the first year of the remaining plan horizon. Non-fiduciary advice is an oxymoron…Comments on CSA consultation 33-404: Enhancing adviser obligations is insufficient-Advisers must be Fiduciaries Non-fiduciary advice is an oxymoron. Fiduciary level of care is achievable using a principle, rather than rules, based approach. Advice is about process not product. Shift of advice delivery from a business to a professional model is achieved by creating a fiduciary friendly context for advisors. Only fiduciaries allowed to use advise/or title. Statutory fiduciary level of care is buttressed with appropriate oversight and enforcement. Vanguardization of investment and re-mutualization of insurance industries would facilitate fiduciary level of care. Rebalancing in retirement Rebalancing should be for risk management. Other rebalancing reasons are essentially active calls on market direction with guaranteed costs without guaranteed benefits. Using appropriate (capitalization weighted) passive broad-market index fund(s), the risky part of the portfolio gets rebalanced automatically; rebalancing is required to align portfolio risk with investor’s risk tolerance at rebalancing time. The difference between rebalancing and determining/implementing risk tolerance based asset allocation is moot, as both must reflect current risk tolerance. A modified approach to rebalancing in retirement is proposed. Don Ezra’s “Most people need longevity insurance rather than an immediate annuity” (A review) Will that be annuity or lump-sum? The annuity vs. lump-sum decision is explored as a function of lump sum offered. On-track to retirement? Objectives, plans and feedback to align: savings rate, retirement age, and expenses Annually exercisable feedback mechanism is provided to assess whether a pre-retiree is on track to achieve financial objectives for retirement and identify corrective steps required to align plan execution and expectations. Stocks in retirement? Asset allocation considerations in retirement How much stock allocation can/need/should I have in retirement? Drivers include personal: goals/objectives, assets/income and fixed/discretionary expenses, risk tolerance, required returns, withdrawal rates, taxes, etc. Management of risks (inflation, market, longevity) in retirement are driving/constraining asset allocation. Stock allocation is not some universal age-dependent glide-path, but it is a periodically updated allocation based on changing personalized context. A spreadsheet is provided to help retirees explore their trade-offs. |
Retirement Planning |
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Advisors/Fiduciary“Fiduciary – Response to “CSA Consultation Paper 33-403”” To “help” advisors meet the client’s best interest standard we must legislate: statutory fiduciary requirement and business models conducive to its delivery “Choosing an advisor” Advisors may provide: financial plan, tax plan, estate plan, risk management, asset allocation, asset management, “open architecture” implementation, rebalancing, performance reporting vs. benchmarks… See more… Transition“Transition to retirement” How to you envisage retirement? How much will you need for retirement? What are your income sources? “Time Diversification: Stocks are less risky over the long-term??? (Not!)” Your asset allocation is determined by your risk tolerance, not just your investment horizon. Within horizon losses are particularly damaging for investors near and in retirement. The combination of market losses with necessary withdrawals can deplete the portfolio rapidly. See more… Accumulation“Control what you can!” Control: savings, spending, costs and asset allocation. “Contribute to RRSP or TFSA? 401(k) or Roth 401(k)? Tax-free or Tax-deferred?” One’s reference is to pay tax on income when your tax rate is lower. Those in highest tax brackets would first lean to RRSP/401(k) for income deferral while those in lower tax brackets would lean to TFSA/Roth plans. Using both is a form of tax diversification. See more… |
Decumulation, Withdrawal Strategies“The only spending rule article you’ll ever need” by Waring and Siegel- A review A dynamic spending rule based on an “annually recalculated virtual annuitization” using annually updated real risk-free rates, conservative years of required income and current assets. Applicable to risk-free and risky portfolios. “Retired” Approaches to be used separately or in combination, strategically or opportunistically as needed at different points during retirement for developing/evolving workable personal withdrawal plan Annuity/Pension vs. Lump-Sum- Part 1: Making the right decision for you where we looked at risks in retirement, Annuity/Pension vs. Lump-Sum- Part 2: Drivers to and away from annuitization which is focused on qualitative considerations toward the annuity/pension vs. lump-sum decision, Annuity/Pension vs. Lump-Sum- Part 3: Quantitative considerations where we explored quantitative considerations in the decision, and Annuity/Pension vs. Lump-Sum- Part 4: Monte Carlo simulation to explore retirement income trade-offs with and without annuitization where we use Monte Carlo simulation to explore the range potential outcomes given assumed Capital Market Expectations, (risk tolerance and corresponding) Asset Allocation, in the context of personal circumstances (Age, Assets, Expenses, Other Lifetime Income sources and the resulting required withdrawal rate) and compare these with annuitization. Annuity/Pension vs. Lump-sum- Part 5: Putting it all together Putting it altogether, you are now ready to explore your own personal situation for the annuity/pension vs. lump sum decision. “Annuity or Lump-Sum (LIF): Upcoming Nortel pensioners’ decision” “annuity or lump sum?” and the “if, when and how much to annuitize?” questions with a discussion of the pros, cons and other qualitative considerations that go into this very personal decision “Vanguard GLWB vs. other decumulation strategies” Vanguard’s GLWB is the product which finally meets the promise of the value inherent in GLWB/GMWB-like strategies. See more… |
Asset Allocation-Portfolio Management“Asset Allocation II” This is the only free-lunch in investing…well almost free “Balanced portfolio: Simple and cheap ETF implementation” A well diversified ETF based portfolio can be constructed for 0.3%/year “Portfolio Management” Implementing strategic asset allocation with ETFs and CEFs, benchmark selection, portfolio monitoring and rebalancing See more… Risk Management“The Pursuit of Risk Management” Bear/reduce/transfer/avoid decision, risk dimensions, risk control via diversification, insurance and hedging “Time Diversification: Stocks are less risky over the long-term??? (Not!)” Asset allocation is determined by risk tolerance, not just investment horizon. Within horizon losses are particularly damaging for investors near/in retirement. The combination of market losses with withdrawals can deplete the portfolio. See more… |
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Personal Finance |
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Insurance“Insurance: Insure or self-insure? Public or mutual?” Use mutual to insure against low probability events of catastrophic financial impact (life/disability/liability/emergency travel health) and consider higher deductibles. “How much life insurance do you need? …..and Risk and Uncertainty” It is not about replacing the value of the life time earning power of the insured, but rather replacing the value of that earning power to those who benefit from and/or are reliant upon it “Individual health insurance considerations for Canadians” A great benefit when your employer pays for it, otherwise you better understand costs, benefit caps and self-insurance with some catastrophic coverage if available at a reasonable price “Long-Term Care Insurance (LTCI) II- Musings on the Affordability, Need and Value: A (More) Quantitative View” Policies are expensive, not standardized, complex, uncertainty of premium increases, fuzzy about if/when/how-much benefits payable; an LTC account might be better use of premium dollars. “Longevity Insurance- What does it buy you?” A great way of (almost) “having your cake and eating it too”; lower cost longevity protection than annuities. “Annuity I” What is wealth? See more… |
Products“Reverse Mortgages” Product is only for somebody who values staying in their home without regard of the impact of that decision on one’s estate. Usually a last resort option after all others exhausted. “Target-Date Funds a passing fad? Problems and solutions to using TDFs as a 401(k) default or option” Far from perfect, but have accumulated $500B assets as 401(k) default. Promoted as “one decision”, low/no-maintenance funds create complexity elsewhere due to their: glide-path variability, higher cost, fit in portfolio, tax efficiency and risk tolerance variability. See more… Special Topics“Behavioral Finance” Modern finance is built on the assumptions that investors “make rational decisions” and “are unbiased in their predictions about the future”, however this is not always the case. Behavioral finance is the field which tries to explain the real irrationality in human behaviour. “Deflation: Impact on retirees” Seniors on fixed income or COLA indexed income, downward trending inflation or mild case of deflation might be beneficial. “Senior Inflation” There is significant evidence that inflation experienced by the elderly is higher (much higher in the U.S.) than that of the overall population. See more… |
BooksRobert Keats’s “The Border Guide- A Guide to Investing, Working and Living in the United States” Covers what you need to know about living on both sides of the U.S. Canadian border or moving across it. Keats is knowledgeable, thorough and shares his expertise generously “Winning the Loser’s Game- Timeless Strategies for Successful Investing” by Charles Ellis, Ellis’s book is a must read (and re-read) for those who want to understand the philosophy of investing and its implementation. “The Quest for Alpha” Larry Swedroe systematically dismantles the theory that active money management (defined by him as stock selection and market timing) can lead to alpha (returns above risk-adjusted benchmark) after fees. “The Black Swan by Nassim Taleb (The Impact of the Highly Improbable)” He defines Black Swans as an outlier of very low probability of occurrence, but very high impact, and after the fact we think that we can explain it. He explains Extremistan vs. Mediocristan, luck as the great equalizer and riles against history and historians. Jonathan Clements’s “Main Street Money- 21 Simple truths that Help Real People Make Real Money” It’s about principles and concepts, with enough detail to move “do it yourselfers” to action. He covers the obvious, the not so obvious and the counterintuitive with equal clarity. See more… |
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Advocacy |
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Pension Reform‘Voluntary CPP’? It could be great! The devil is in the details It can include homemakers/caregivers, can ‘nudge’ Canadians to a higher savings without impacting businesses with a mandatory matching, can allow lump-sum contributions, can add a low-cost (passive) investment vehicle with systematic withdrawal option for those who prefer it to annuity only option, can add longevity annuity option. And finally, can allay the fears of those concerned with having too many eggs in one (existing CPP) basket. “Expanded-CPP Plus” A proposal which expands options beyond the dimensions (maximum pensionable earnings and percent benefits) currently under consideration, in dimensions such as: compulsion to save, contributors, investment vehicles, longevity insurance… “Systemic Failure in Canada’s Private Pensions: Who could have prevented it? What could be done now?” The systemic failure is obvious- fewer promises and failure to deliver on already earned promises: imploding proportion of private sector employees with DB plans, layer upon layer of checkpoints (Board of Directors/Officers, plan administrators, plan trustees, investment managers, actuaries and regulators) all failed to prevent/flag massive underfunding, and upon employer bankruptcy underfunded portion of the pension vaporized “Is the CPP low cost? No it’s not, but its existence can enable ultra-low-cost expanded-CPP or PRPP” The 2010 administrative and investment management cost of CPP was expensive at 1.32%. An even more stark reminder of its cost is that Canadians pay 9.9% of their insurable earnings for 6% worth of benefits. What a deal! But the existence of this infrastructure offers opportunities for overbuilding additional low-cost retirement savings. “Pension Reform (presented to Ontario Expert Commission on Pensions- Nov 1, 2007)” Problems and solutions for DB pension plans and a proposal for pension system revolution (presented to Ontario Expert Commission on Pensions in Ottawa on November 1, 2007) See more… |
Nortel Pensions“Annuity or Lump-Sum (LIF): Upcoming Nortel pensioners’ decision” “annuity or lump sum?” and the “if, when and how much to annuitize?” questions with a discussion of the pros, cons and other qualitative considerations that go into this very personal decision “Doomed Nortel Pensioners? Outside-the-box Pension Options and Path to Pension Reform” The pension system failed Nortel pensioners; it is now time to let pensioners control their own destiny. See more… Financial Industry Remake“Ideas for an investor friendly financial industry in Canada” Fiduciary responsibility, low-cost asset management with decoupled fee-only advice, and mutual rather than shareholder owned financial corporate organization would lead to investor friendly financial industry. Tools“flexibleRetirementPlanner is a real gem!” With this Monte Carlo based planner you’ll get a feel for the sensitivity of outcomes to different (and more realistic): withdrawal strategies, returns (adjustable throughout the life-cycle), cash-flows (SS/CPP, pensions and annuities) and inflation. Just remember Richard Hamming’s admonition that “The purpose of computing is insight, not numbers.” |
Longevity Insurance“Longevity Insurance” Longevity insurance mitigates risk of outliving one’s assets. It is a low-cost life contingent deferred annuity delivering a turbocharged lifetime income starting at age 85, with the help of mortality credits and tax deferral. “Pure longevity insurance payout option in CPP would reduce retirees’ longevity risk” Adding a pure longevity insurance payout option to the CPP would go a long way to ease the pain of private sector employees with disappearing DB pensions “Longevity Insurance- What does it buy you?” A great way of (almost) “having your cake and eating it too”; lower cost longevity protection than annuities. See more… Florida’s Discriminatory Property Taxes“Tax system is not just ‘loony’; to snowbirds it’s outrageous” With non-homesteaded property owners paying 2-10 times the taxes paid by homesteaders, politicians buy the Florida voters with the tax dollars of out of state property owners. “Snowbirds’ Florida Tax Crisis- Are Snowbirds still welcome in Florida?” It’s been called loony, outrageous, two-tier, discriminatory, confiscatory and worse. The bottom line is that Florida has a property tax system that is rigged against snowbirds. “Florida’s non-homesteader snowbirds shafted again by new property tax Bill 381″ Don’t let the reduced cap from 10% to 5% of non-homesteaders tax value increase fool you. Whether prices rise or fall more of the load is being shifted to the non-homesteaded property owners. See more… |
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Paint Your own Canvass |
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| “Renewal in retirement…’painting’ on a new ‘canvass’” Retirement is not about freedom to do nothing; it is about renewal and opportunity for growth. So join the revolution and use your newfound freedom to choose your “canvass” and start “painting” your second life. | “How to Retire Happy, Wild and Free” Ernie J. Zelinski in a perspective orthogonal to the financial focus, explains that “money can’t buy happiness” and reminds us of the other non-financial ingredients critical for a happy retirement. Purpose, community, structure, giving, exercise (physical and mental), positive attitude and spontaneity are just a few of the essentials. |
Note: RetirementAction.com has been running continuously since its inception in late 2006, first as a website, then re-hosted as a WordPress.com blog/website in March 2012. All posts dated pre-March 9, 2012 show their re-host date rather than original posting.
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In the article about the CPP you say “…Canadians pay 9.9% of their insurable earnings for 6% worth of benefits…”
What does that mean?
The current 9.9% CPP premium rate (joint employer and employee contribution, increased in the 1990s from about 6%) on up to 25% of maximum pensionable earnings, only buys approximately the benefits corresponding to about a 6% contribution. This is in order to make up for shortfalls resulting from: excess benefits received by the first generation of CPP recipients as compared to their contributions, and the current demographic realities associated with a pay-as-you-go pension system. (Other reason might be that CPPIB assumes that they can earn a real return of 4.2% after expenses which recently have been running at about 1%, so they must earn a nontrivial 5.2% real return in the current environment, and this as you know is anything but a cake-walk!
Even if I can’t locate the exact cell you are referring to, perhaps this might answer your question…you can calculate the minimum assets required to deliver the “Fixed+L1” expenses after a stock drop of some value, this would be $(Fixed+L1)/%(maxDraw) ..if for example Total Assets=$300, minimum Assets required to deliver “Fixed +L1″=$200, then the difference between the total assets and the assets required to deliver the “Fixed+L1” draw is $100, then you could have a $100/50% in stocks or $200 (because 50% of $200 is $100…then $200/Total Assets=$67%…therefore risk-free assets would have to be 33% of Total assets ($300) or $100…so if you have a 50% market frop so the $200 stock become $100, then you still have $200 to meet the “Fixed+L1” requirements.
This, by the way, I have recently discovered to be exactly analogous to the Constant Proportion Portfolio Insurance calculation for stock allocation, which makes sense in retrospect.
I hope this might answer your inquiry…