blog18jun2007

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Charles Farrell’s simple financial ratios are presented in WSJ’s “Are your finances ready for retirement?” . One set of ratios pertains to savings to annual pretax income at various ages suggested to be 0.9, 4.5 and 12.0, while debt to income ratio should be 1.5, 0.75 and 0.0 at ages 35, 50 and 65, respectively. This is assuming Social Security income of $16,000 and retirement assets earning between 4-5% real annually. The other question discussed is how much can you withdraw annually without running out of money (for a more detailed discussion you can go elsewhere at my website at the Retired sublink under Planning) You have close to 90% probability of not running out of money during a 20, 25 and 30 year retirement with withdrawal rates of 5, 4.5 and 4.0%, respectively. Incidentally Jonathan Chevreau has a good article this past week on withdrawal strategies also quoting Bengen’s work referred to elsewhere at my website “A withdrawal strategy for the long run”
In OK, I admit it. I need some help.” Glenn Ruffenach suggests that since most people don’t have the expertise and don’t take the time to develop a financial plan for retirement. In effect he says that even those who think that they are doing a good job can use a second opinion from an expert to insure no regrets later on. He then suggests a few sources of “fee only” (as opposed to “fee based) advisors such as http://www.napfa.org/, www.cambridgeadvisors.com and www.garrettplanningnetwork.com
It is true in most countries that “Retirement portfolios stick close to home” . In Canada it is even worse, because of the hangover from the, now eliminated, 30% foreign cap in RRSPs. Quoting Michele Gambera, who suggests that the appropriate asset allocation would be more in line with the MSCI all-country index, the effective mix for any North American investor would be more along a minimum of 25% and a maximum of 50% foreign. For Canadians 10-20% Canadian equity content is the suggested range with the rest of NA portion filled from the U.S. (But he does not dismiss out of hand factoring in your retirement liabilities, i.e. the expected place of retirement as an important variable).
In  “Foreign investment: a world market cap approach to foreign investment”  it is suggested that the North American content may be even lower than the commonly reported. The typical MSCI allocation is 42.4%, 25.8% and 31.8% for Americas, Asia/Pacific and Europe, Africa and Mid-East. However according to the World Federation of Exchanges U.S. 36.3%, EAFE 44% and Emerging 19.7%. Canada is 3.6% by the way. So using 30% foreign content for a Canadian investor is not a very good starting point for a well diversified asset allocation.
Insurance companies see a unique opportunity with the wave of boomers approaching retirement, as reported in “As boomers retire insurers aim to cash in” in the WSJ. Insurance companies can offer a class of product not available from mutual fund companies, i.e. annuities. Specifically the big push is expected to be in variable annuities which in addition to offering longevity protection, can also offer guarantees of minimum returns and tax-deferred accumulation with, occasionally the option to annuitize or not and draw funds as required and leave assets to an estate. The problem is that it is very difficult to figure out if options offered are worth the fees, as high as 2.5%/yr (in the U.S., and no doubt a lot higher in Canada). The insurance companies on the other hand are trying to get a handle on the longevity risk they are assuming (e.g. sudden medical discoveries curing cancer, heart disease, etc) and financial risk associated with guarantees in sustained underperforming markets. You have to remember, of course, that these contracts which may have to run 25-40 years are highly dependent on the long-term financial health of the insurance company.
And finally the Globe and Mail reports that “Majority of firms eye retiree benefits cuts” . It reports that 55% of the surveyed Canadian employers are considering elimination of postretirement benefits (e.g. health benefits, life insurance), while another 22% considering reduction of the benefits paid. The report does not indicate the context of the question being relatively young employees only or including those near or in retirement. Difficult to see how if the latter context would be contemplated, that there would not be legal challenges by those who are affected.
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