Hot Off the Web– November 8, 2010

Personal Finance and Investments

In a Journal of Financial Planning interview “Retirement investing, withdrawals, and tax efficiency”William Reichenstein suggests ways to adding value with tax efficient withdrawals. Some of the suggested mechanism(aimed at U.S. based readers, but no doubt many aspects also applicable in the Canadian context) are: (1) first take money from taxable and then from tax-sheltered accounts (except if individual’s tax rate is unusually low), (2) generally speaking hold stocks (assets with accumulating capital gains) in taxable account and bonds (assets generating interest income in tax-sheltered account; except to the extent that you need to maintain your target asset allocation and cash reserves, (3) factor in tax rate of ‘t’ into asset allocation by assuming that you only own (1-t) of the assets in tax deferred accounts (e.g. 401(k) or RRSPs, but not Roth or TFSAs on which tax was pre-paid), (4) handle longevity risk by delaying Social Security (CPP/QPP) to age 70 for a single individual or the higher earner of a couple, or purchase an indexed annuity or even better a ‘longevity annuity’ (longevity insurance where at age 65 you buy  a life contingent income stream for life starting at age 85), (5) don’t bother with variable annuities as they come with high costs and they transform capital gains on equities into ordinary income taxed at a higher rate, however a low-cost fixed annuity from a financially strong insurance company has merit during retirement for reducing longevity risk.

Tim Cestnick in the Globe and Mail’s “How income splitting can generate big savings” writes that “Income splitting is one of the pillars of tax planning.” He suggests three approaches (and promises more next week). Among the suggestions are: lend to family at interest (for loans set up before December 31 interest is 1% for the duration of the loan), and “lend or give money to acquire a principal residence” to allow them to invest with freed up moneys.

The Globe and Mail’s Rob Carrick in “A safe way to juice up your yields” suggests looking for higher GIC yields in: secondary GIC market, guaranteed interest annuities (GIA) from an insurance company and deposit brokers (I have no personal experience with any of these and whether they offer the same level of guarantees as CDIC.)

Real Estate

Ladurantaye and Grant in the Globe and Mail’s “CREA slashes home-sales forecast” write that Canadian home sales are expected to fall 4.9% this year and another 9% the next. Bank of Canada governor Carney said “We’re not forecasting an abrupt correction, but it is a possibility, given two factors: the speed with which house prices rose and, secondly, the absolute weight of debt in the economy that is tied to housing.”

On the US housing front Gillian Tett in the Financial Times’ “Housing market gridlock must be swiftly resolve”writes that “in places such as Florida, 50 per cent of delinquent borrowers are still living in their homes after two years. This pattern prompts many civil groups and some politicians to cheer. But it is also delaying any sense of resolution to the housing woes… some 6.7m homes are deemed to be delinquent, or (supposedly) in a state of foreclosure. And with that much of the market now sitting in limbo, this could potentially have a subtly corrosive impact on price attitudes… the key point is that whatever policy is imposed, be that foreclosure or universal modification, it needs to be imposed swiftly and clearly and that seems unlikely to happen now.

Damien Cave in the NYT’s “In Florida, a CEO prepared for cuts” writes that Florida’s new governor Rick Scott is “a no-nonsense leader, fixated on costs, and willing to cut programs and employees if they fall short of his goals”. Mr. Scott was a successful businessman who over 10 years built Columbia/HCA into a $20B and 285,000 employee corporation, but he was “famous outside his company for $1.7 billion in fines that Columbia/HCA paid for defrauding Medicare and other federal programs.” It will be interesting to see if he will rectify the ludicrous Florida property tax system and try to rebuild Florida as an attractive place for non-homesteaded out of staters to buy property or will continue with policies not helpful in stemming the free-fall of Florida’s real estate prices. (Thanks to MB for recommending the article.)

The Economist’s house price indicator reported in “Floor to ceiling”looks at global price changes, and provides an estimate of over/under valuation based on price-to-rent ratio. Singapore, Hong Kong and Australia are still firing at double digit annual price increases, while Hong Kong, Australia and Spain are the three most overvalued markets. Interestingly, Canada is 24% overvalued, while the US is indicated to be somewhere between 2.1% undervalued to 10% overvalued depending on which index is used.


The Ontario government released last week another call for pension feedback with the issuing of a very layman accessible report on pensions. Ontario is soliciting feedback before November 29, 2010. I encourage you to send in your comments; you can read my response at Ontario Pension Feedback in which recommendations include: protect earned pensions in bankruptcy, expanded CPP (participation, replacement rate, income ceiling), and innovation (fiduciary, mutual ownership, low cost, longevity insurance, auto-enrolment, feedback on expected retirement income). CPP expansion as currently proposed will do nothing for those near or already in retirement. You can also view “Ontario Finance Minister Dwight Duncan at CARP AGM speaking about and answering questions on pension reform”. Jonathan Chevreau discusses the pension issue in “The case for a “Big CPP” or modest expansion of the Canada Pension Plan”and he reprints some observations on a CPP expansion by actuary Hamilton.

Keith Ambachtsheer in “Five big issues for all pension funds” is quoted as saying that lack of “alignment of interests” results in 1-2% reduced returns, poor “governance erode another 1-2%; also lack of “sensible investment beliefs” and insufficient scale all add to substandard pension plan returns.

The National Post’s Norma Greenaway reports in “Liberals plot Canada Pension Plan strategy” that Canada’s “Liberal party is contemplating an election platform that promises a voluntary supplemental pension plan”. The “white paper”, leaked by the NDP, proposes an alternative approach to the “modest and gradual” expansion of the CPP. (I suspect that the answer is to do some of both as I describe in my Ontario Pension Feedback.)

Things to Ponder

In the WSJ’s “Seniors stuck with recovery tab” Tom Lauricella warns seniors to be careful “about not taking on risks of unaffordable losses in search of yield.” In the Feds new QE2 adventure seniors can end up paying the shot. “Banks, which have been sitting on reserves of cash and not making loans, are the Fed’s main target. But retirees end up suffering collateral damage. The Fed “is bleeding retirees,” says Lawrence Glazer, an adviser with Mayflower Advisors in Boston. “It’s brutal.”” In the near-term, US money market rates are <-.1% and five year Treasuries yield 1.2%;; if QE2 succeeds in increasing inflation, the seniors on fixed incomes will be clobbered by corrosive inflation.

Days just before and after the past week’s announcement of the $600B QE2 various writers weighed in with their thoughts on the impact of the coming QE2. The Mohamed El-Erian FT article lists the problems that “QE2 blunderbuss likely to backfire” such as the Fed is the only one doing any heavy lifting in the US, other countries don’t need the liquidity resulting in currency tensions, and this further erodes the US$ reserve currency status. Bill Gross says that “Fed easing may mean 20 percent dollar drop”. The FT’s “Quantitative easing: calm after the storm” reports that “The relative calm belies a feverish excitement among the investing classes, as pundits and players argue about what it all means. Views range all the way from safe and sensible to dangerous and foolish… Attackers take a longer and more cynical historical view: however virtuously they began, pre-modern episodes of money creation almost all ended in inflationary tears.” Jonathan Chevreau in FP’s “Helicopter Ben revs up his rotors” quotes an NPR translation of “Bernanke Speak” to explain why QE2 was necessary; he concludes that inflation is coming to emerging markets first and to developed markets afterwards. Martin Feldstein in FT’s “QE2 is risky and should be limited” argues that QE2 is not the right remedy for US economic problems. He suggests that this will just drive up other asset prices than before and create new bubbles which will then crash, causing additional serious damage. “What is required is action by the president and Congress: to help homeowners with negative equity and businesses that cannot get credit, to remove the threat of higher tax rates, and reduce the out-year fiscal deficits.” And in another Lex article in the FT it argues that “QE2: The least worst option” “if it boosts animal spirits, consumers’ spending and house prices. Some inflation, inevitable in this scenario, need not matter. It would ease banks’ credit problems and reduce the nation’s debt overhang. But if QE2 leads to rampant inflation – or to fears of it coming soon – investors might revolt at the extra risk on Treasuries and bid up yields.” (The QE2 train left the station; we’ll shortly see where it is taking us.)

Scott Patterson asks if “Inflation…or deflation?”, or both, are on the way in his WSJ article, and he looks at which one is better for the stock market. He quotes data indicating that stocks do significantly better in deflation than inflation (which he defines as >8.5% per year).

Market Watch’s Andrea Coombes in “Retire in France at age 62? In Turkey, it’s 45” has an interesting table of “retirement ages, by country and year” which suggests that Turkey should be preparing for a massive influx of immigrantsJ. However the trend to the inexorable rise in retirement age in most/all countries (including Turkey) is unstoppable given financial and demographic realities. (Thanks to SI for recommending the article.)

The WSJ’s “Generational Tension” reports that “Many people are earmarking more of their estate for their own expenses, and shrinking the amount they plan to leave for heirs…. But there’s a silver lining: The children will benefit if parents have the resources to fund all their own care needs in later life. “I tell clients to hope they will not have to support their aging parents””. (Gen X-ers and gen Y-ers may have to scale down their SUVs and scale up their savings to secure their retirements.)

James Stewart in the NYT’s “Is it really springtime for stocks?”argues that QE2 and the outcome of last week’s mid-term elections in the U.S. “have created a near-perfect alignment of the political and monetary stars for stocks—and other investment assets….stocks and many other asset classes are far from bubble territory. As for inflation, it hardly seems to be any near-term threat, though investors should always have some long-term protection.”

And finally, In Kiplinger’s “The financial toll of Alzheimer disease”  Susan Garland warns that “A decline in the ability to handle financial matters is one of the early signs of Alzheimer’s disease. Even if your loved one is showing only mild symptoms, seek a diagnosis” and “There’s an epidemic of financial exploitation aimed at people with mild cognitive impairment”. Ideally, seniors should put some plans in place while they’re still healthy. Someone with early-stage Alzheimer’s can sign documents and make decisions. “The best way to ensure that things will be done the way you want is to talk with family members or a close friend while you’re in control.” The article discusses various aspects of this complex and potentially touchy issue. (Thanks to SI for recommending the article.) Tara Siegel Bernard also discusses this difficult subject this week in the NYT’s “Stepping in for a parent with Alzheimer’s”.


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