Contents: Disability insurance, RMD-based withdrawal strategy, target-maturity bond ETFs, scary retirement study, fiduciary advisors in Canada? house prices: Canada peaked-US bottomed? Florida house prices advance, PRPP dead? Federal pensions still generous, low interest rates NOT root cause of underfunded pensions, yuan to trump dollar? change at Fed feared? Ben Stein’s advice, root cause of extraordinary longevity on Ikaria Island?

Personal Finance and Investments

In the NYT’s “Weighing the odds of disability, for insurance purposes” Paul Sullivan discusses ways in which people think about the (US) cost and value of disability insurance.  The purpose is “replacing a portion of your salary if you get hurt or become sick and are unable to work for several months or more. Still, figuring out the real risk of becoming disabled is difficult…. you also wonder about the likelihood of an insurer paying a disability claim”. On cost “…the premium was 1 percent of someone’s salary in a group plan and 3.5 percent of that salary in an individual plan… cost of policies that increase someone’s disability payment above the typical 50 to 60 percent of income is even higher…(because) adverse selection bias: the people most likely to buy additional coverage are likely to have some condition or family history that makes them believe they will need it…” As to value, buyers consider “…whether they could maintain their lifestyles if they could no longer work. But most claims do not last that long… claims on policies with a 90-day waiting period last about three years, while those filed on policies with a 180-day waiting period run to 4.5 years. But insurers are quick to point out that every company is paying claims on people in their 20s who will be on disability until their policies end, usually at 65.” But insurance companies work very hard in “trying to get people back to work quickly so they could stop making payments”. (Using the principle that you should insure only low probability catastrophic events, weigh carefully the waiting period (effective deductible) you select and limits on how long payments are made including the definition used to determine whether you are able to return to work- at your job or any job, at the same salary or much lower salary.)

Sun and Webb’s paper “Can retirees base wealth withdrawals on IRS’s required minimum distributions? from Center for Retirement Research at Boston College recommends a modified RMD (US-IRS’s required minimum distribution not the same as Canada’s RMD) based strategy in retirement. Their suggested modification overcomes the objection that the RMD overly constrains consumptions early in retirement (in the US, 3.12% at 65 and 3.65% at 70) when retirees are in better health; specifically they recommend to “consume interest and dividends (but not capital gains), plus the RMD percentage of financial assets”. (It is interesting to compare the RMD differences between the US, described in this article, and the Canadian, available for example at The RRIF basics, with the Canadian ones typically much higher at all ages. Irrespective of the specific approach recommended in this paper, the concept of a withdrawal rate which is a function of the remaining life expectancy but measured at the 75-90 percentile point is not a bad idea. This means that even with the proportional withdrawal approach the withdrawn percentage may increase with time if necessary. You might speculate why the Canadian withdrawal rates are much higher and whether that’s better or worse, I’d need think about this some more; but forcing higher withdrawal rates will reduce the portfolio much faster (though one must not spend all that is withdrawn) and/or accelerate the collection of deferred taxes in Canada or it would preserve a larger asset base in the US for the ages >85 when high LTC costs might be incurred and which typically are borne by the individual.)

In the Globe and Mail’s“Target maturity ETFs: Taking aim at bigger bond returns”Rob Carrick discusses the benefits of relatively little known target maturity corporate bonds to build your fixed income portfolio; “they mature on a preset date, just like those hard-to-buy individual corporate bonds. You can use them in a bond ladder, or you can match maturity dates with your particular financial needs.”RBC and BMO offer such ETFs with annual fees of about 0.3-0.35% MER. The important metrics for these types of bond funds are not current yield but YTM (yield to maturity) and fees. You might also be interested in reading Jean Lesperance’s  “Fixed income: Which is “best”- GIC, Individual bonds, target maturity ETF or traditional ETF”and Morningstar’s  “Bond laddering with ETFs”on the same subject. Investment News’ “It looks like a bond and smells like a bond, but it’s an ETF” also discusses target-date bond ETFs. (On the surface these appear to be a good idea but YTM minus fees seem to result in less than GIC-like rates with higher credit risk which GICs don’t have; on the plus side the ETFs should offer better liquidity (at TBD cost) compared to GICs.)

In Investment News’ “Halloween near but latest retirement study downright scary”Mary Beth Franklin calls the results of the latest Wells Fargo survey of 1000 middle class Americans scary. Among the findings were respondents indicating that: (1) they are not concerned that while they expected to need $300,000 of assets for retirement, they only had $25,000 saved, (2) they were planning to deal with the shortfall by working longer, (3) they were expecting in retirement to have <50% of their preretirement income, and (4) they arrived at the required assets for and income in retirement by guessing the numbers. The article suggests that advisors could help many of these individuals with a ‘reality check’ with”how much to save, how to invest and how much they can afford to spend in retirement”.

In the Financial Post’s “Canadian regulators weighing standards for financial advisors” Barbara Schecter looks at some of the tentative efforts under way to at least explore stricter fiduciary standards for financial advisors in Canada. “Investor rights advocates say advisors should be held to a higher standard of care, similar to the fiduciary duty of a company executive or lawyer — and note that other jurisdictions including the European Union and the United States are moving in this direction. But improvements to advisor responsibility and accountability in Canada have been slow to come… Many ‘advisors’  are arguing that  any proposed changes in the direction of fiduciary responsibility must first demonstrate the “benefits” before proceeding with changes and make sure that higher costs should not be the unintended circumstances. FAIR Canada executive director Pascutto “is encouraged that regulators highlighted the common misconception among investors that advisors must always act in the best interest of their clients.” (I continue to be puzzled how anyone in the”advice” business could possibly object to being required to act in the best interest of the client; I must just be old fashioned and probably don’t fully understand the definition of advice.)

Real Estate

Canada’sTeranet-National Bank House Price Index  for  September 2012 indicates that prices decreased MoM in six of 11 metropolitan areas: Edmonton (-0.7%), Montreal (-0.6%), Ottawa (-0.8%), Quebec (-0.2%), Victoria (-1.3%) and Vancouver(-1.2%), and YoY in Vancouver (-1.4%) and Victoria (-2.6%). According to the Canadian Real Estate Association sales volume was off in Vancouver (-33%), Ottawa and Montreal (-17%), Quebec City (-14%). “Prices were up 0.5% from the month before in Calgary and Halifax, 0.4% in Winnipeg, 0.3% in Hamilton and 0.1% in Toronto.”

Garry Marr writes in the Globe and Mail’s “Toronto home sales showing more signs of slowdown” that even though year-to-date sales are on par with 2011, new home sales in Toronto were the second lowest in September for 13years. Reasons mentioned include: tighter bank lending rules, reduced mortgage amortization from 30 to 25 years. “High-rise or condo sales across the GTA for the year are 19% above the long-term average but remaining high-rise inventory is the second highest on record.”

In Bloomberg’s “U.S. home prices jump the most since 2006, Zillow says” Prashant Gopal reports that according to  Zillow’s Home Value index “U.S. home values jumped 1.3 percent in the third quarter, the biggest gain since 2006, in an uneven recovery across the country…The median value rose to $153,800 from $151,800 in the previous three months on a seasonally adjusted basis.” According to Zillow’s economist “The housing market is on the mend, but the housing bottom will be a protracted one…We will see more muted appreciation in the near term before we get back to normal appreciation trends.”

In Palm Beach Post’s “South Florida home values up 8 percent surpassing national average” Kimberly Miller reports that according to the same Zillow report “South Florida’s home values were up nearly 8 percent in the third quarter of the year from the same time in 2011 and are expected to outpace national price hikes through 2013…(the) report puts the median value of single-family homes, condominiums and townhomes in Palm Beach County at $146,900 during the third quarter of the year, up 6.3 percent from the same time in 2011”.

Pensions

In Benefits Canada’s “Is the PRPP dead?” Greg Hurst writes that “Unanimous agreement of (provincial) finance ministers (in 2010) is not the same as full commitment of their respective governments, nor is such agreement binding on a successor finance minister… I believe that the political winds in Canada have shifted away from the PRPP initiative. Other than Menzies, it seems to me that nobody has much interest in PRPPs.” Hurst opines that politicians have lost interest in pensions because: “discourse on pensions leads to scrutiny of their own arrangements”, and complexities of pensions are “difficult to simplify in a political context”. “The weak federal leadership on PRPPs coupled with the shift of political attention to address “pension envy” of relatively generous public sector pensions has stolen the focus from PRPPs. Nonetheless, the underlying problems of low (and declining) private-sector pension coverage and adequacy of savings for retirement income security remain.” (The PRPP is not dead; it was stillborn because it didn’t address any of the real pension issues requiring reform.) The Financial Post’s “No traction for pooled pensions” also covers the same topic, and it happens to mention that some in the financial industry are concerned that another option beside already existing alphabet soup (TFSA/RRSP/RRIF/LIRA/LIF, DB/DC pensions and non-registered funds will just confuse Canadians. However most in the industry are hoping/awaiting with great anticipation the gold rush they expect from the new flood of PRPP money. (PRPPs would be great for the financial industry, but unlikely so, in their present form, for Canadians saving for retirement.)

In the Financial Post’s “Federal pensions still ‘unusually generous’” Fred Vettesse opines that while the Public Service Pension Plan’s (PSPP) more than 450,000 members might consider the omnibus bill changes “distressing and draconian” given that “The normal retirement age goes from 60 to 65 while employees with 30 years of service will now have to wait until age 60 to receive an unreduced pension which used to be available as early as 55. Moreover, employees will be required to pay 50% of the cost of pensions being earned for future service versus the 37% share they are currently paying”. Still, the federal PSPP is still “unusually generous” compared to what’s available to other public employees and even more so compared to the private sector or compared to the changes introduced to the OAS.

And now for a real ‘surprise’??? In Bloomberg’s“Pension funding scare won’t frighten all states”Peter Orszag reports that according to Alicia Munnell’s new book on “State and local pensions: What now?”the reasons for the most serious underfunding have nothing to do with low interest rates or over-generous benefits. Instead“The states with huge funding gaps have “behaved badly”…They have either not made the required contributions or used inaccurate assumptions so that their contribution requirements are not meaningful.” She added, “Fiscal discipline simply appeared not to be part of the state’s culture. (Of course it is not a surprise, rather it sounds like the same as the root causes of the systemic failure of Canadian private sector pensions: contribution holidays, aggressive actuarial practices, aggressive investments hoping to minimize contributions with investment risk ultimately borne by the pensioners when the employer file for bankruptcy protection, inadequate regulations and regulators. The low interest rates and generous benefit are not root causes but just excuses and diversionary tactics. )

Things to Ponder

The Economist’s“Turning from green to red”discusses a new study by Subramanian and Kessler which looks at co-movement of emerging market currencies with  the dollar vs. a currency like the Swiss franc. This measurement indicates that the dollar’s influence in the past couple of years has declined compared to the pre-2008 crisis. “The greenback has in the past played a dominant role in East Asia. But if anything, the region is now on a Yuan standard. Seven currencies in the region now follow the Yuan, or redback, more closely than the green(back)… Outside East Asia, the redback’s influence is still limited.” Based China’s economic and trading growth, the study authors see “China’s currency should surpass the dollar as a key currency sometime around 2035”.

In the Globe and Mail’s“Markets worried about Bernanke”David Berman reports about the uncertainty created by the coming end of the fed Chairman’s term in January 2014 and the indications that if Mr. Romney wins then he may not reappoint him or that Mr. Bernanke may not seek another term. The possibility of a new Fed Chairman instituting a different, specifically more restrictive, monetary policy and its impact on the market and economy weighs heavily on many people’s mind.  The US News & World Report’s “Why Wall St doesn’t want Bernanke to leave” covers same topic.

In a short video interview with Ben Stein about his new book“How to really ruin your financial life”he mentions some of the obvious, but often neglected, to do list: plan your required substantial retirement savings with ALM (asset liability management) in mind (Americans don’t save enough), avoid stock picking- just buy the indexes, consider both your human and financial capital, and build your human capital by developing good work ethic. (I didn’t read the book, but perhaps Ben Stein’s  very simple and clear communication will help get the these much needed messages through to the young people who still have time to correct the errors of those who no longer have time to do so in retirement.

And finally with a non-financial closing, in the NYT’s “The island where people forget to die” Dan Buettner (in an excerpt from the upcoming 2nd edition of his book “Blue Zones”) writes about reasons for “extraordinary longevity”  on Ikaria island: “It’s not a ‘me’ place. It’s an ‘us’ place.”… Wake naturally, work in the garden, have a late lunch, take a nap. At sunset, they either visited neighbors or neighbors visited them…”, “(Their diet) was rich in olive oil and vegetables, low in dairy (except goat’s milk) and meat products, and also included moderate amounts of alcohol (red wine). It emphasized homegrown potatoes, beans (garbanzo, black-eyed peas and lentils), wild greens and locally produced goat milk and honey… they eat very little refined sugar, and their breads have been traditionally made with stone-ground wheat…”, “…many of the teas they consume are traditional Greek remedies. Wild mint fights gingivitis and gastrointestinal disorders; rosemary is used as a remedy for gout; artemisia is thought to improve blood circulation…” (The article makes no mention if Ikarian men worry much about running out of money, i.e. longevity risk, but given their long and healthy lives they must be doing something right.)