Hot Off the Web– March 28, 2011

Personal Finance and Investments

In WSJ’s “Retirement 101: How to figure out what you’ll need?”Brett Arends reports on the latest dismal retirement Confidence Survey by EBRI: <50% are confident about ability to retire comfortably, 13% “very confident” (about half that of a few years ago, and 27% “no confidence” (about triple of a few years ago). He then describes the six steps to calculate the assets you’ll need. Included in the list are: (1) calculate required annual income in retirement (the simplest first estimate is to assume you’ll need the same as when you are working except you will no longer be saving for retirement), (2) estimate Social Security and other (e.g. pension) income, (3) required income from investments (this is equal to (1)-(2)), (4) estimate years in retirement (e.g. of 65 year old couple there is 25% probability that at least one will live to 95, so 25-30 years is not unreasonable), (5) un-indexed annuities can be expected to half in purchasing power over 30 years, so he suggests a conservative (balanced) portfolio which is likely to deliver inflation plus 3%, (6) if you are not achieved 20x your annual income recommends that you save, save, save. (He didn’t mention tax considerations, so I assume he is doing all calculations in pre-tax amount.)

In the Globe and Mail’s “Getting a grip on dividend gross-up” John Heinzl writes that Canadian tax rates on dividends have been rising as a result of the decrease of corporate tax rates. “The bad news is that tax rates on dividends are rising. Why? It’s all because of a reduction in corporate tax rates, which are causing the gross-up and DTC rates to fall in a way that’s not beneficial for investors. For example, an Ontario resident with employment income of $80,000 will pay about 16.5-per-cent tax on eligible dividends in 2010, rising to 19.9 per cent by 2012. The same person living in British Columbia will see the tax rate on dividends rise to 10.6 per cent from 5.3 per cent (To see how dividend tax rates are changing in your province and income bracket, visit”

In the Globe and Mail’s “Five life insurance questions that you should ask” Barry Higgins suggests five questions to consider before responding to ads to buy life insurance for just a few dollars a day. The most important of his questions is to ask “What am I trying to accomplish?”

Jamie Golombek in the Financial Post’s “How deep are Canadian pockets”reflects upon some of the statistics behind the just defeated Canadian budget. Golombek writes that 680,000 seniors would eligible for some of the proposed supplement; to qualify for the full $600 individual and $840 per couple supplement, individuals would have to have <$2,000 and couples <$4,000 annual income in excess of OAS/GIS, and the supplement is completely eliminated at $4,400/$7,360 for individuals/couples. Furthermore he writes that “Of the 24.5 million returns filed, 18 million Canadians reported total income of $50,000 or less. That’s not a typo. In other words, ignoring individuals who don’t file returns such as children, nearly 75% of tax-filing Canadians earned under $50,000 in total income in 2009. Add another five million Canadians who reported total income of between $50,000 and $100,000 and you conclude that about 95% of individuals have income below $100,000 annually. What about Canada’s highest income earners? The statistics say 880,000 Canadians reported income in the range of $100,000 to $150,000, 333,000 reported incomes between $150,000 and $250,000 and a mere 174,000 of tax return filing Canadians, or 0.7%, had income over $250,000.”

In WSJ’s “Why your nest egg may not last” Tom Lauricella warns readers about taking for granted not running out of money in retirement using the 4 or 5% “safe” withdrawal rates suggested by many. Expecting to go on auto-pilot with such an approach, especially with the current low interest rate environment coupled with relatively high stock valuations is not advisable (I have used “insanity” as a better description before). Referring to a paper by Vanguard he writes “While a withdrawal strategy “is important, the key ingredient in a long-term spending plan is flexibility,” the report said…Rather than take out a steady 4% or 5%, the Vanguard report suggests many investors would generally stand a better chance of not running out of money were they to adopt a strategy where the percentage of withdrawals was designed to rise and fall between 2.5% and 5% of the prior year-end portfolio, depending on the market’s ups and downs. In short: After a good year, take out more, and following a bad year, less.  However, one challenge this approach presents is that a 2.5% to 5% band represents a huge amount of variability in income for a retiree relying on savings to help pay the bills.” (I haven’t as yet read the referred to paper, but sounds like a sensible approach.)

In WSJ’s “Higher taxes loom for 401(k) savers” Andrea Coombes warns that “delaying the tax hit on retirement-plan contributions, a much vaunted benefit of 401(k)s, isn’t as valuable if you face higher income taxes when you retire. Yet higher taxes rates are all too likely in years ahead.” What in the past was considered a no-brainer may be less so in the future given the inevitable rise in tax-rates according to some. Coombes writes that “Given the tax-rate outlook, savers should at least consider putting a portion of the amount they save for retirement into a Roth individual retirement account — or a Roth 401(k) if one is offered by their employers.” In an earlier Coombes article last week “Is a Roth 401(k) right for you?” she writes that the choice between after tax (Roth) and pre-tax traditional 401(k)) comes down to a simple question “will your taxes be higher or lower in retirement?” She says that given the uncertainty you might wish to do both. (Tax diversification actually makes sense, since the future is unpredictable. If tax rate in retirement is expected to be lower than while working that traditional 401(k) is preferred otherwise Roth; but who knows what future tax rates will be, plus it is also a matter of each individual’s financial circumstances. You might also be interested in one of my old blogs on this subject TFSA or RRSP? 401(k) or Roth 401 (k)?- .)

You’ve heard it before, but it’s worth repeating. In Jillian Mincer’s Smart Money article “Living longer: The god new and the bad” she warns that retirees underestimate the time they’ll have to spend in retirement (i.e. how long their money will have to last), not just because of not having or understanding the implications of the available statistical data, but also because it’s convenient to “bury one’s head in the sand”, because the implications of living longer are reduced spending while in retirement. Also, 25-30 years in retirement means that the corrosive effect of inflation must be factored in, and then you might not be able to avoid stocks.

Real Estate

For the U.S. as whole the data is dismal. In the Financial Times’ “US home sales fall more than expected” Shannon Bond reports that NAR numbers show that US home re-sales are down in February (to 4.88M) 9.6% MoM and 2.8% YoY; prices are also down 5.2% YoY to a $156,100 median. “All-cash sales hit a record 33 per cent in February, and sales of repossessed homes rose to 39 per cent of total sales from 37 per cent in January. The number of homes on the market continued to rise, gaining 3.5 per cent to 3.49m available homes. At this pace of sales, it would take 8.6 months to clear that inventory, up from 7.5 months in January, and well above the six months economists say is average in a healthy market.” Other articles reporting the depressing US real estate news are“For U.S. housing a new collapse”, “US housing barometer points to danger” (“Home prices have already dropped more since their peak in 2006 than during the Great Depression of the 1930s”), “Existing home sales in U.S. slump; Drop to lowest since April 2002” and “US home sales: the dark before the dawn?” (“New home sales fell by 28 per cent from the same month of 2010 to 250,000. The accompanying statistic that this is the lowest since 1963 fails to capture just how lousy …”)

The Florida picture in February appears a lot brighter, though one month does not make a trend. In Bloomberg’s “Naples rises from Florida housing swamp as wealthy buyers return to market” Dan levy reports that “While much of Florida’s real estate market remains depressed by foreclosures, buyers seeking a second home in the state’s affluent vacation enclaves are “finally getting off the fence”. “Sales in the Naples area last year rose 10 percent, the first annual increase in at least five years”. On the east coast of Florida Boca Raton and West Palm Beach condo sales show increases of 32% and 40% YoY. ““Given that they are historical vacation destinations for the wealthy, and the stock market having risen so much, it’s possible that they get a nice snap back even though I’m calling for no change nationwide,” Yun (NAR chief economist and housing cheerleader) said.” Other articles covering Florida’s real estate market are “Southwest Florida condo sales up 30% as Sarasota-Bradendon prices rise from January” and “Home sales, Prices rebound- Reason for optimism?”.


In FP Comment section of the Financial Post you can find my March 23, 2011 letter to the editor  The real pension conflict” (Re: “Pension conflicts” Ronald B. Davis, March 22)in which I write: “Ronald Davis writes that defined-benefit plan deficits are due to: (1) regulations permitting benefit promises to employees without requiring the contributions necessary to safely meet the promises, specifically by permitting the discounting of liabilities with expected but unearned returns on assets (this is what I (PB) call the lunacy of regulatory and actuarial practice), and (2) conflict of interest between employers’ management and shareholders, for choosing the cheaper but riskier to shareholders approach for accounting for pensions in order to beef up managements compensation. But Mr. Davis forgot about the real conflict of interest that is between employer/shareholder and employee, whereby the former groups conspire to underfund employees’ pensions to pump up company financials and stock prices on the backs of the employees, whose pension plan assets and deferred wages (pensions) are put at risk in inappropriate investments and insufficient funding. Then to top it all off, Mr. Davies opines that “under insolvency legislation, most pension plan claims for payment of a deficit in funding are rightfully (???) among the last to be paid” — that is outrageous! If DB plans were part of the employees’ compensation package and employees were prevented by the government from making RRSP contributions because of their “pension adjustment” (the fictional amount that the employer contributed to employees’ pensions), then that is what should be paid to them before other unsecured creditors are paid in insolvency, because pensions are deferred wages.”

In WSJ’s “Public pension-fund squeeze” Neumann and Corkery write that the Calpers pension plan assumed investment return  “highlights a debate that has caught fire in recent months: whether the underfunding at many public pension funds is partly a result of unrealistic investment expectations as well as accounting methods that underestimate the true size of liabilities.” “To say that you should adopt an assumed rate of return because you want to keep contributions low is absurd,” (a better descriptor than ‘absurd’ would be ‘lunatic’, though the difference here, in a public pension plan as opposed to a private one, is that here the con job is played on future tax-payers whereas for private plans it’s played on employees.)

In Benefits Canada’s “Is there a future for DB?”Malcolm Hamilton concludes that “The DB experiment failed because the economic foundation on which it was built proved faulty. The concept, while plausible, did not work as advertised.” (I have to agree with him as I have said many times that Canada’s private sector pensions are in “systemic failure”, but not necessarily (only) for the reasons that he gives, and he does not mention the requirement of meeting existing already earned commitments; anything less than that would be to allow a “fix” of the failure to be exclusively borne on the backs of its working beneficiaries and retirees, which would be a disgrace.)

As to the March 22 Canadian budget, it was mostly a non-event, with minor improvement for lowest income Canadians, but pension reform only rated essentially a throwaway line to the effect that they are (still) working on a low-cost PRPP pension option (no time-frame and no definition of low-cost) and the provinces still discussing a modest CPP enhancement (as if the Federal government has washed its hand of this); not impressed.

Things to Ponder

In WSJ’s “BOC’s Carney: Inflation Risks ‘Real’”Edward Welsch writes that Bank of Canada’s Carney says that the fears of global inflation risks are real as reflected in the bond market “inflows toward shorter-term durations” over the past several months. Deflation, according to Carney was “”not the most likely scenario.” If another global crisis hit advanced economies and global growth, it would likely be a temporary setback in a more permanent shift of global growth being driven by emerging markets, he said.” As to emerging markets, he indicated that there are risks due to the continued growth of investment inflows, but they can be mitigated by emphasis on longer-term investments and regulation of housing markets.

David Berman in the Globe and Mail’s “Where Shiller sees bubble”reports that Shiller didn’t mention stocks and bonds as necessarily being in the bubble territory, however “he does suspect that commodity prices satisfy the general idea of what a bubble is – “social epidemics, fostered by a sort of interpersonal contagion.” Commodities have a “new era” story attached to them, and rising worries about food prices and weather-related impact on heating fuel prices are contagious stories, he contends (no word on rising demand from China and India though)… But his favourite candidate – though far less investable for most investors – is U.S. farmland, where prices soared last decade and did not correct to nearly the same extent as the housing market.”

Valentijn van Nieuwenhuijzen is a dissenting voice who doesn’t believe that developed countries are on the inevitable path to inflation. In the Financial Times’ “Inflation concerns are simplistic and overblown”he argues that usual perceived drivers assumed by those who say that inflation is imminent present two highly questionable claims: (1) “unprecedentedly “easy” monetary policy will automatically lead to excessive inflation” (Japan proves otherwise), and (2) “ “overheating” risks in developed market economies are already a clear and present danger” (not true except perhaps in Germany).

In Bloomberg’s “Advanced-nation debt risks future fiscal crisis” the IMF’s John Lipsky is quoted as saying that “the fiscal fallout of the recent crisis must be addressed before it begins to impede the recovery and create new risks”. He says that long term interest rates are too low and predicts 100-150 bp increase as a result of 25% increase in sovereign debt ratios. (Recommended by CFAInstitute Financial Newsbriefs)

And finally, in WSJ’s “Meet ‘Future You’. Like what you see?” Jason Zweig reports on virtual reality tools available which allow you to see yourself as you’ll look in the future. “…that may be just what it takes to shock Americans into saving more. At Stanford and other universities, computer scientists, economists, neuroscientists and psychologists are teaming up to find innovative ways of turning impulsive spenders into patient savers…Why is it so difficult for people to set aside money for the long-term future? Low earnings and high temptations are obvious reasons. But perhaps the most basic cause is a fundamental human frailty: We view our future selves as strangers.” Zweig mentions that Warren Buffett is one of the rare people who according to his biographer, apparently said in his youth “Do I really want to spend $300,000 for this haircut? He was thinking about the vast amount of money he wouldn’t have decades in the future because of the small outlay he might make in the present.” “These researchers are tapping into what is called the Proteus effect, behavioral alterations in the real world that are triggered by changes in how our bodies appear to us in a virtual world. “ “In one experiment, young people who saw their elderly avatars reported they would save twice as much as those who didn’t.”


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