Hot Off the WebApril 26, 2009

WSJ provides a good overview on available options with annuities in Tergessen and Scism’s Getting Smart About Annuities “. There is a growing interest in the U.S. after steep market losses, to “secure” one retirement with annuities. They point out that the appeal of immediate annuities seems great; a 65 year old male could get 8.4% of invested amount compared to 4% recommended withdrawal from a portfolio. Other immediate annuity option is to partially annuitize to secure minimum income requirements above social security and then draw 4% from the remaining assets beyond what was annuitized; you could also ladder (spread out your immediate annuity purchases over time) and spread money among different highly rated insurance companies. (The WSJ also has an article on how to check if your insurance company will likely be around to pay for your annuity at “Buying an annuity? Kick the tires”) The other approach is to buy a “longevity rider” (longevity insurance or delayed payout annuity) where a 65 year old could get for $71,000 one-time premium a $60,000 income per year starting at age 85. The authors mention a third option, variable annuities, which supposedly give you an opportunity to share in the market upside, but due to high annual fees you can safely skip this option from consideration. (Don’t forget that buying an individual male annuity may sound like a great income boost, buy when the male dies so does (usually) the income stream and the invested assets that generated it; therefore for a couple a joint annuity would be required to have an income stream while either one is still alive.)

Jonathan Chevreau in Financial Post’s “Nest egg dilemma still not cracked” discusses size of nest egg required for retirement and suggests 20x (current) annual income. He then proceeds with the debate whether 50%, 70%, 80% or 100% income replacement rate is appropriate. (Of course it is not income replacement that is important, but meeting planned/expected expenses for the target lifestyle in retirement.) Jon’s argument is that there is “no harm in aiming high. Overshooting would not be a catastrophe, but undershooting might be.” (Good approach!)

Sun Sentinel’s Humberto Cruz discusses the key related topic “Set financial goals for retirement” . He argues that the goal is very individual, a function of your needs and the more modest those needs the less risk you need to take. The recommended starting point is “to track current expenses”, then factor in an expected 3% inflation per year plus some special items like occasional new car or a major family vacation. The bottom line is that you can draw 4-5% a year from a 60:40 stock bond portfolio or that you need assets equal to 20-25x required expenses grossed up for taxes. (Same ballpark as Chevreau’s recommendation.)

Thane Stenner in Globe and Mail’ argues that “The secret to staying rich” is not about how you invest.  It is about spending!  This a great reminder to readers that you can’t asset allocate your way out of (an unsustainable spend rate) from a fixed pool of assets. With withdrawal rates over 5% you have a greater than 50% chance of exhausting your portfolio. He quotes and advisor that 3-4% spend range is more appropriate depending on the age of the client and it should be reviewed annually. “A more conservative withdrawal rate approach is in the best interests of all investors, irrespective of wealth levels.” (you might also want to re-read Rob Arnott’s “Spend less and save more is recipe for retirement “)

WSJ’s Veronica Dagher reviews CFA Institute Steve Horan’s tips for would be retirees in “Read this before you retire” The key tips are: (1) safe withdrawal rates (not 10% but 3.5-6% depending on your age), (2) protect portfolio around retirement (reduce equity component, then 5-10 year into retirement you can increase equity allocation again), (3) plan for  a long life, (4) flexibility (don’t rush into full retirement too early),  (5) watch fees (1% higher fees can reduce retirement wealth by 25%!)

Financial Post’s Jonathan Chevreau says that “rumours of the death of buy-and-hold may be premature” in “Keep faith in buy and hold” quoting academic studies and financial advisors. He closes with a quote from advisor Robert Smith “buy-and-hold works, but not in isolation. Investors need proper asset allocation geared to their risk tolerance, portfolios must be well-diversified and investments can’t have been purchased at bubble-like prices. They also need to buy during the tough times to bring down their average costs”.

Inflation or deflation? Martin Feldstein warns in the Financial Times’  “Inflation is looming on America’s horizon” that you shouldn’t fall for recent apparent deflationary numbers (primarily due to falling commodity prices). He argues that while the current large (10-13% in the U.S.) deficits alone may not necessarily lead to inflation, when accompanied by rapid increases in money supply high inflation will be almost inevitable.

WSJ’s Brett Arends thinks that now may be the time to consider the buy-write or covered-call strategy in “Buy-Write: Safe harbour in troubled times?” The idea is to sell calls on shares that you already own, so it is a bet “that the shares won’t rise quite as far, or quite as fast, as others seem to think”. He quotes research result looking at data between 1988-2006 showing that a buy-write strategy returned comparable returns to the S&P500 but with 2/3 of the volatility! He gives some examples of vehicles which investors could use play this strategy like Barclays BWV or some CEFs that use this strategy. (However, some may argue that that after a significant market drop, this strategy may limit your upside.)

Globe and Mail’s Rob Carrick discusses with lawyers the opportunity to sue your financial advisor in “Portfolio battered? You may have a case” . The client may have a case when inappropriate/unsuitable investments have been recommended and the case may be done on a contingency basis if the there are six figure losses involved.

There is no shortage of articles in the papers on the pension crisis in general and Nortel in particular. Here are a few that you might find interesting.

Stephen Donald in the Financial Post’s “The pension killer”  conveniently blames primarily the governments’ regulatory and tax policies. (Yes, but not quite; you could read my “Systemic Failure in Canada’s Private Pensions: Who could have prevented it? What could be done now?”)

In the Financial Post’s “Universal Pension Plan== Highlights of Tuesday’s Finance Committee transcript” Jonathan Chevreau summarized some of the discussion among those supporting increasing/extending CPP at one end to those leaning toward Ambachtsheer’s CSPP (Canada Supplementary Pension Plan). Claude Lamoureux of the Canadian Institute of Actuaries, among other things, also suggested that “Retirees need to be given priority in bankruptcy proceedings” (and he is absolutely right in that assertion! Those interested in the complex subject of pensions, may find  this Chevreau blog interesting reading.)

Lee Greenberg in the Ottawa Citizen’s “Nortel pensioners may not get relief from the province” reports that Premier McGuinty, after indicating that there may not be sufficient funds in the PBGF insurance fund to cover losses on the horizon, did not exclude the possibility of a taxpayer rescue in some shape or form indicating that “We’re taking a look at this very closely. We want to try to be fair to the pensioners but, at the outset, I want to assure you, we cannot make them whole. We will not have the money to make them whole.”

And while there is no good news for Nortel’s Canadian/Ontario pensioners, the UK governments Pension Protection Fund gives comfort to UK pensioners in “Nortel Networks UK Pension Plan – Member Announcement” . Not only are the pensions for males over age 65 and females over 60, 100% protected, but are also indexed up to 2.5% inflation per year! Those who have not reached those ages are protected up to 90% of the pension up to almost 28K pounds, depending on age! (This confirms that it is not just Nortel’s U.S. pensioners, but U.K. are being protected by government run pension insurance funds, protecting pensioners up to about $50K or so per year, while Ontario pensioners are covered up to $12,000 per year and Canadians outside Ontario have no pension insurance coverage at all. Looks like Thatcher’s UK and Reagan’s US looks after pensioners a lot better than the socially progressive(?) Canada. Perhaps we need to re-evaluate what type of society we actually have in Canada.)

And finally, Bloomberg’s quotes Janice Payne of NOP (one of the law firms arguing for representation before the court) arguing that Nortel can’t pick opposing firm, lawyer tells judgeand that the “optics are terrible”, in the fight to represent some or all of Nortel’s pensioners, severed employees, current employees. Clearly, the Court must be struggling with a decision, since we haven’t as yet heard its ruling.


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