Hot Off the Web- March 5, 2012

Personal Finance and Investments

In the Financial Post’s “How much does retirement really cost” Mark Miller reports that “Although the median income for retired households is 57% that of working households, retired households spend about 80% of what working households spend. More affluent households, which have been able to save for retirement, use those assets to plug the gap between income and spending… (though) overall spending in retirement falls with age… The main reason is that health deteriorates with age, and that means people can’t necessarily do all the things they planned… people between the ages of 50-64 spent 9% of their total budget on health items, while those 85 or older spent 18%. In its annual estimate, Fidelity Investments said a 65-year-old couple who retired in 2011 would need $230,000 to pay for out-of-pocket medical expenses, excluding nursing home care.” (This is U.S. data.) Another article, the WSJ’s “How much you need vs. how much you can lose” quotes Dan Ariely who “surveyed investors about how much of their current salary they thought they’d need in retirement, most answered 75%. When he probed further, he discovered they’d merely given what they thought was the “correct” answer based on a rule of thumb they’d heard from the financial industry. But when he probed further still about how these investors actually wanted to live in retirement, he found that they’d really need about 135% of their current salary, or nearly double the amount they’d originally indicated.”

In the Globe and Mail’s

“One more reason to sock away money” Jessica Hume discusses why Canadians additional savings to cover health care and drugs for retirement years. “the recently released Drummond report, (in which limiting health-care spending increases and reducing the number of seniors who qualify for the Ontario Drug Benefit plan are only a couple of the recommended service cuts) as yet another indication of the increasing burden on the individual to cover his or her own needs post-retirement.”

In the Globe and Mail’s “The five pillars of planning that underpin tax savings” Tim Cestnick discusses tax planning schemes to create tax savings: deducting (work from home(home office expenses), swap your debt (deductible for non-deductible), realize some losses), deferring (registered plans,  estate planning (leave appreciated assets to spouse, estate freeze), dividing, disguising and dodging. (He’ll cover the last three on the list next week)

In the Globe and Mail’s “Ten steps to take before hiring a lawyer” Jeff Fung list the following among his recommended ten steps: problem identification, setting realistic budget, select candidates, negotiate a better arrangement and others.

In the Toronto Star’s “Retirement planning: 10 common mistakes” Jana Schilder reports on some important and often irreversible financial mistakes: abdicating responsibility to advisor, not saving for retirement because you have a company pension, too much risk, inadequate diversification, no financial plan, no understanding impact of high fees/costs, allowing ‘products’ to trump planning. (Thanks to Ken Kivenko of Canadian Fund Watchfor recommending.)

John Heinzl in the Globe and Mail’s “My advisor is demanding a big fee increase. What should I do?”discusses what might be considered a reasonable percent of assets charged by an advisor/broker for a $1M portfolio. Numbers mentioned range from 0.5% as low to sliding scales of 0.6%-1.4% (higher for smaller assets). (Coincidentally, a reader just asked whether 1.75% is a reasonable fee for a $400,000 discretionary account. The other factors that need to be considered are what services are included: financial planning, insurance advice, is account managed on a fiduciary basis, are there any other fees/costs, are you getting value for the money you are paying (a self-managed indexed portfolio might under 0.3%).)

Janet McFarland in the Globe and Mail’s “’Pre-retirees’ are prey for fraudsters”writes that according to a  BCSC report “Canadians most vulnerable to an investment fraud are “pre-retirees” between 50 and 64 who have little investment knowledge and are worried about having too little to live on in retirement…”. And yes 14-25%/mo return is fraudulent rather than an opportunity, yet 19% said they’d consider it.

Real Estate

In MacLeans “Time to panic about the housing market”Tamsin McMahon writes that Canada today “looks remarkably like the America of 2005—or even worse by some measures—complete with record house prices and unprecedented debt… Canadians owed an average of $1.53 for every dollar they brought in, up 40 per cent in the past 10 years and just below where the U.S. was before its housing crash. By the end of 2010, the average homeowner had just 34.3 per cent equity in their home, the lowest level in two decades and a 20 per cent drop in just four years.” It is not only the high house price to income ratio and home ownership ratio of 68%, the “elephant of all is how much the boom has been fuelled by cheap and abundant credit thanks to a low interest rate policy pursued by the Bank of Canada, along with government-insured mortgages… But the debate has already morphed into one over whether the Canadian government should be in the mortgage insurance business at all, or whether the CHMC is the product of a bygone era when working stiffs had little opportunity to buy their first home without a huge down payment.”

According to the just released December 2011 Canadian Teranet-National Bank House Price Index “For a second consecutive month, Canadian home prices in December were down 0.2% from the previous month… December prices were down in five of the 11 metropolitan markets surveyed: 0.8% in Victoria, 0.5% in Ottawa-Gatineau and Montreal and 0.3% in Toronto and Vancouver. For Ottawa-Gatineau, Vancouver and Victoria it was the third consecutive decline and for Toronto it was the second. Prices in Edmonton were flat. Prices were up 0.3% in Quebec City, 0.6% in Winnipeg, 0.7% in Hamilton and Calgary and 0.9% in Halifax. In Calgary the December rise ended a run of three monthly declines… The December 12-month change varied widely from market to market. It was 9.9% in Toronto, 8.7% in Winnipeg, 8.2% in Vancouver, 7.7% in Hamilton and 7.2% in Quebec City – five markets in which the 12-month rise exceeded that of the composite index. It was 6.2% in Montreal and 4.6% in Ottawa-Gatineau.”

The December U.S. “S&P Case Shiller Home Price Indices” indicate that “ Both the 10- and 20-City Composites fell by 1.1% in December over November, and posted annual returns of -3.9% and -4.0% versus December 2010, respectively. These are worse than the -3.8% respective annual rates both reported for November. With these latest data, all three composites are at their lowest levels since the housing crisis began in mid-2006. In addition to both Composites, 18 of the 20 MSAs saw monthly declines in December over November. Miami and Phoenix were up 0.2% and 0.8%, respectively… Up until today’s report we had believed the crisis lows for the composites were behind us, with the 10-City Composite originally hitting a low in April 2009 and the 20-City Composite in March 2011. Now it looks like neither was the case, as both hit new record lows in December 2011.” And Shobhana Chandra writes in “U.S. home prices decline 4%, more than forecast”that “Distressed properties returning to the market mean prices will stay depressed, prompting buyers to wait for cheaper bargains and impeding construction. While sales have begun to stabilize, a rebound in home values may take time…”

Robert Reich writes in the Financial Times’ “Housing is the rotten core of the US recovery”that what is required is a modification of the bankruptcy laws “so homeowners can use the protection of bankruptcy to reorganise their mortgage loans” and/or the FHA “to take on a portion of a household’s mortgage debt in exchange for a share in the home, of the same proportion, when it is sold”.

Pensions

In the Globe and Mail’s “Companies see ‘pension crisis’ on the horizon” Janet McFarland reports that “Companies with pension plans want governments to give them short-term or permanent extensions to help cope with growing shortfalls in the plans…(a new survey indicates that ) Canada is facing a long-lasting “pension crisis” and a desire by plan sponsors to find ways to reduce risk in their investment portfolios, even if it means accepting lower returns.” (It is amazing that people would now suddenly think we have a pension crisis in Canada; Canada’s pension system has been in systemic failure for much of the last decade at least, due to ineffective regulations/regulators, conflict of interest pension professionals, merged employers/sponsors/administrator roles which result in irreconcilable conflict of interest for this role due to fiduciary responsibilities to both pension plan beneficiaries and shareholders. You hear about the much mentioned market drops in 2000 and 2008, the current ultra-low interest rates, but you hear little mention of wilful under-contribution in good times and contribution holidays. The federal and provincial governments are in a state of paralysis on what if anything to do on the unravelling of already earned pensions, as this article describes, and pension reform on a going forward basis; these are both covered in my Pension Reform: It’s not rocket scienceblog and numerous others on the subject.)

Canada’s is not alone having a private sector pension fund crisis, the US private sector problems are discussed in both the Bloomberg’s “Pension pain mounts as Fed boosts liabilities” and the Economist’s Buttonwood blog “Raiding the coffers” referring to a NYT articleon how “state pension plans are borrowing from their pension plans to fund their own pension contributions.” “In practice, the smoothing tends to go one way. When the funds are in surplus, contributions tend to be slashed because things appear to be going well; when the funds are in deficit, full contributions are not made because times are hard. The result is a long-term tendency towards deficit… Disguising the costs only creates the potential for a crisis when a) taxes will have to be raised very sharply, b) other government services will have to be cut or c)pension benefits will have to be reduced, leaving no scope for retirees to cushion themselves.” (Federal governments are caught between their perceived need to keep interest rates very low to contain the cost of servicing their debt and trying to boost the economy, and the collateral damage that is contributing to the destruction of the private sector pension system.)

In Benefits Canada’s “OAS and age: When are we old?”Fred Vettese essentially argues that we can’t have it both ways, and he is confused. We can’t simultaneously argue that mandatory retirement should be done away with as it was last December in Canada, and a few weeks later argue that 65 is the definition of “old age” and the start Old Age Security pension payments should not be delayed to age 67. (He argues he point quite effectively.)

By the way, according to the Globe and Mail’s “Budget cuts will hit MP’s pensions”, Bill Curry reports that “The government’s March 29 budget is expected to include changes to public-service pension plans – likely by requiring workers to contribute more. It will also include long-term changes to Old Age Security, possibly by raising the age of eligibility to 67 from 65. Sources say the message from the Prime Minister was clear: Selling these changes will require MPs to do their part.”

In MoneyMarketing’s “MetLife confirms guarantee tie-up with BlackRock”Tom Selby reports MetLife and Blackrock have announced “guarantee pension products which allow customers to manage investments according to their market volatility preferences… The three new managed wealth portfolios offer maximum equity exposure of 50 per cent, 60 per cent or 70 per cent. BlackRock will vary the funds’ exposure depending on market conditions. The minimum guarantee terms on the new funds start from 10 years. Guarantee charges start from 0.4 per cent, with product charges from 0.35 per cent.” (I haven’t seen any more detailed description of the product and while the price sounds low, the guarantee only seems to kick in after ten years. The recently announced Vanguard GLIB and this product seem to indicate that there is a significant perceived market for such products.)

Things to Ponder

In the WSJ’s “Dow 1,339,410: The latest milestone”Jason Zweig looks at some interesting stock index numbers, which are usually reported without dividends (price-only basis). The Dow which, passed 13,000 this week, would have been at 1,339,410 with dividends reinvested in the index (i.e. on a total return basis); calculated on “real wealth” basis (i.e. dividends reinvested , but adjusted for inflation) it would be 46,986 which is “0.5% and 2.6% average annual return since year-end 2007 and over the past decade, respectively”. According to Zweig, that while stocks might not be cheap, the important thing is that there has never been a better time for the individual investor, as only since the advent of indexing can investor capture the full return of the market.

In the Financial Times’ “Why the risk-on rally will not last”Richard Bernstein opines that the risk-on (e.g. “commodities, real estate and emerging markets”) sentiment, vs. risk-off (e.g. “US Treasuries, German Bunds, US dollars and even US stocks”)  will not continue. He argues that “The performance see-saw between risk-on and risk-off assets reflects this fight between economic and political realities. When these economic realities prove more powerful than policy, the risk-off trade outperforms…”

The Economist article on ETFs “From vanilla to rocky road”also subtitled as “The Darwinian evolution of exchange-traded funds” takes a 30,000 ft view of the ETF landscape covering its growth, asset base, and concerns about ETFs: the push to “innovate” by latecomers to get a foot in the door of the new expanding business, opaqueness of synthetic (vs. physical) products, counter-party collateral risks, high-frequency trading, leverage, derivatives, active (vs. passive), and excessive correlation of the stocks in the basket.

And finally, in WSJ’s “Psychos on Wall Street”Al Lewis figures that all the “scandals and implosions” could only happen if Wall Street has a significantly higher proportion of psychopaths or sociopaths than the population at large. The quotes estimates as to the proportion of psychos on Wall Street from different sources range from a psychologist at 1 of 25, to a recent article by CFA Magazine at 1 of 10, to an ex-fraudster and stock manipulator who calls himself a “psycho in remission” a proportion is 8 of 10. “”Sociopath” and “psychopath” describe a similar range of anti-social traits, including a lack of empathy, no regard for consequences and unbridled risk-taking.” The article suggests that these traits are also more frequent for politicians and CEOs. (No doubt this is in some sense a tongue and cheek view. But some might argue that Wall Street types are not really risk takers since they only put at risk OPM (other people’s money), but there would be less argument with “lack of empathy” or stupidity/hubris.)