Contents: Retirees and low yields, RRSP contribution vs. deduction, female investing is about goals not returns, don’t repeat 2008 mistakes, annuities? adviser compensation, lifecycle event questions, US home prices up but Shiller still sees risk, CMHC wants foreclosure info hidden, economic signals of Canada’s weakening housing market? pension gap, Air Canada pension relief? Nortel US wants professional fees hidden, is this expanded CPP? Fed bond buying to continue and the delayed exit strategy is to linger, smoke-and-mirrors for government data make believe? economic train-wreck? Gross: sell QE offenders, Vanguard’s active funds, Elford video: advisers vs. salespeople.

Personal Finance and Investments

In the WS’s “Low yields spell trouble for retirees” Tom Lauricella discusses the trouble that lurks for retirees as a result of the current low interest rate environment: low current income (in fact negative real return), and low returns lead to higher withdrawals from assets than affordable from a portfolio which is supposed to last to end of life. Many question the old 4% rule, whereby one takes 4% of assets in year one of retirement and increases dollar amount each year by inflation, with some suggesting withdrawals as low as 2.8% to prevent running out of money. But William Bengen, the father of the 4% rule, sticks with it and suggests that emerging market bonds might be a way to boost bond returns.

In the Financial Post’s “RRSPs: Contribute now, deduct later” Jamie Golombek discusses the “difference between an RRSP contribution and an RRSP deduction. The amount you can contribute to an RRSP is based on your RRSP contribution limit, which is printed on your Notice of Assessment from the Canada Revenue Agency… But just because you make an RRSP contribution doesn’t mean that you have to claim it all in a particular year… My general advice is to claim as much of the RRSP deduction as needed to bring your income down to the second highest federal tax bracket, which is around $85,000.”

In WSJ’s “The rise of the female investor” Susan Gregory Thomas discusses women as investors and quotes a Vanguard study which suggests that women “are less aggressive than men when it comes to money management… are more likely to buy and hold… (and women) don’t want to hear about the growth or comparative performance of different funds; they want information about reaching their long-term goals.” She concludes with a quote of “Risk averse doesn’t mean you are afraid- it means you’re thinking.”

In WSJ’s “Note to self: Don’t repeat the mistakes of 2008” Andrea Coombes warns that you should: not fall for hype, not fail to diversify, not buy on past performance, not invest without a plan, not disregard risk.

In the Globe and Mail’s “A neglected way to buy peace of mind” Rob Carrick discusses annuities the problems with them (e.g. loss of control, current low interest rates), some solutions (e.g. partial and staged annuitization, and annuities complemented by a balance portfolio of stocks/bonds/cash) and some benefits (mortality credits and “peace of mind” of a regular income stream). The article includes RetirementAction.com as a source of info on the annuity decision (e.g. most recent one Annuity or Lump-Sum (LIF): Upcoming Nortel pensioners’ decision, and some earlier ones like: Annuity I: What is wealth?, Annuities II: (Almost) Everything you wanted to know about annuities, but were afraid to ask, Annuities III and Annuities IV) The article also has links to some sources of annuity rate information like Hughes Trustco which indicates that a joint annuity for 65 and 75 year old couple in early 2013 would have delivered annual cash flows of about 5.1% and 6.8% with zero residual assets remaining after last of the couple dies. (Annuities are not for all, but some have no choice but go for them.)

In Financial Planning’s “How advisors get paid now” Charles Paikert reports that on a recent study of RIAs (who are required to act as fiduciaries when dealing with clients), 94% are still getting compensated as a percentage of assets under management but “55% of surveyed advisors also charge their clients on an hourly basis, 43% charge fixed fees and 10% receive performance-based fees… hourly and fixed fees being used more with smaller clients and for other discreet services… We are charging fixed fees for special projects. It’s an approach clients seem to like more than hourly fees.” “37% of RIAs surveyed have staff members who sell insurance products, and 11% offer accounting services through an affiliated entity; 9% sell securities through a registered broker-dealer”, but commissioned related products are expected to further decrease at RIA-related entities ”as more advisors migrate to independent model”.

The Investment Fund Institute of Canada at “LifeCycle chart: Important life event questions” has a useful set of questions to consider at key life event through one’s lifecycle. (Thanks to Ken Kivenko for recommending.)

Real Estate

The just released December 2012 S&P Case-Shiller Home Price Indices show that “The national composite posted an increase of 7.3% for 2012. The 10- and 20-City Composites reported annual returns of 5.9% and 6.8% in 2012. Month-over-month, both the 10- and 20-City Composites moved into positive territory with gains of 0.2%; more than reversing last month’s losses. In addition to the three composites, nineteen of the 20 MSAs posted positive year-over-year growth – only New York fell.”

In a WSJ interview by Nick Timiraos  “Shiller’s bottom line: Risk lingers in housing” Robert Shiller comments that “…upward momentum, which by my general rule of forecasting has been good for the future” but he is “…more worried than most people that it could be a short-lived turnaround… Part of the reason the indexes have gone up is because the foreclosure boom has receded. Foreclosed homes sell at a lower price, and the share of those sales has been falling. People might be deceived by this by looking at the indexes. The question is whether the gains will be sustained.” “It’s possible that home prices have hit a bottom, but heavy government involvement to stabilize the mortgage market and the broader economy has made it harder to gauge the durability of recent home-price gains”

In Canada in the Financial Post’s “CMHC seeking to hide foreclosure information from home buyers” Garry Marr reports that “Canada Mortgage and Housing Corp. has been asking realtors for months to keep consumers in the dark about whether the properties it sells are part of a foreclosure.” This put brokers into a situation where the CMHC said don’t tell customer about foreclosure while “repossession field is currently a mandatory field in the brokerage system” which meant they had to answer ‘no’ i.e. lie. The matter was thankfully resolved satisfactorily for the brokers, at least, by making the repossession field not mandatory. (The customer may not be that thankful with this solution.) Some suggest that the government backed CMHC who will end up holding the bag on foreclosed properties is “trying to get a better price” by keeping the status of the property hidden. According to real estate spokesperson the broker is required to provide the information if customer asks.

In the Bloomberg’s “Canada losing debt halo as bull market in housing peaks with Carney” Thorpe, Argitis and Dmitrieva discuss the condo overbuilding situation in Toronto and suggest that “The weakening property market is just one sign that Canada’s economy, which everyone from International Monetary Fund Managing Director Christine Lagarde to Carney himself has touted as a model of stability, is stalling.” “While Canada may get stellar marks for navigating the global credit crisis, it did so with a borrowing binge, says Benjamin Tal, deputy chief economist at the investment-banking unit of Canadian Imperial Bank of Commerce. “We basically borrowed our way out of this recession,” Tal says. “Now, it’s payback time. We will be in for a period of long, slow growth.”” But David Rosenberg, also quoted in the article, says that he doesn’t see a near-term trigger for interest rate increases which might precipitate a significant fall in home/condo prices. (There you have it; the forecast is sunny, cloudy, rain, snow, with the occasional tornado/hurricane.)

Pensions and Retirement Income

In the WSJ’s “Why the corporate pension gap is soaring” Vipal Monga reports that according to one estimate US “…companies now hold only $81 of every $100 promised to pensioners”. The main culprit fingered is the Fed’s low interest rate policy driving liabilities up; increasing life expectancy is another contributor to the pension gap. However the article notes that “pension plans could quickly recover if interest rates started to climb.” Some companies are getting religion now with “liability driven investment” where they shift out of equities into bonds to make sure that if interest rates continue to fall at least their pension deficit won’t deteriorate further. (Had they done this 5-10 years ago the situation today would be less dire, doing it now just locks in existing pension deficits with no opportunity for its reduction should interest or stock markets rise.)

Macleans “Will Air Canada’s pension relief hurt competition?”  discusses Air Canada’s “request for a decade of relief from the $4.2-billion deficit in its defined benefits pension fund”, which small regional carriers argue is counter-competitive and instead the government “should provide broad pension assistance to all Canadian companies”. (Of course if the requested pension relief to Air Canada would be provided, this would add risk to pension plan beneficiaries (employees/pensioners) but the union would likely be flexible/realistic given the situation and will readily settle for more risk but preserving existing pension “promises” rather than take a guaranteed cut should Air Canada choose (like Nortel did) bankruptcy to escape pension plan liabilities/responsibilities and/or a capping of pension benefit accrual now to minimize further aggravating plan deficits. Thanks to Susan Eng for referring article.)

In Dow Jones Daily Bankruptcy Review’s “Nortel US seeks to hide some fees amid cash battle”  Peg Brickley reports that “Nortel ‘s U.S. unit is seeking an exemption from a new bankruptcy rule that would require Nortel-paid professionals to disclose details of what they’re paying other professionals out of the company’s cash. If it succeeds, the move could allow Nortel U.S. to hide millions of dollars worth of billings in a case that has begun to draw fire from members of the public concerned about the toll Nortel’s bankruptcy has taken on its most vulnerable creditors, disabled workers (and pensioners). Around the world, lawyers and advisers have made $837 million out of the collapse of the one-time telecommunications icon, according to a tally by Diane Urquhart … Nortel U.S.’s bid for permission to start keeping secret the details of some of the fees in its case comes as the American unit prepares for open court clashes against Nortel’s Canadian and European units, with the $7.3 billion sale proceeds as the prize.“ (Now how pathetic is that? The Nortel bankruptcy case will definitely be settled no later than when all available funds have been distributed to the lawyers working on the case. Thanks to Diane Urquhart for referring article.)

In the Financial Post’s “The right way to expand CPP” Wilson and Mintz propose an alternative to CIBC CEO’s last week’s voluntary CPP expansion idea; by keeping contributions mandatory but increasing benefits “…from 25% to 35% of earnings upon retirement staged over time… from $12,150 to $17,010, using 2013 figures… The increase in CPP benefits would require higher payroll taxes. However, the increase would be minimal (not sure how minimal is minimal given that today a 24 month delay from age 65 to 67 would only result in less than 17% increase in the delayed/deferred CPP, well below the proposed 40% increased here; perhaps contributions would first be minimally higher for 10 years and only then would increases kick in?) if the eligibility age for CPP is increased from 65 to 67 years, beginning in a decade, similar to the recent reform for Old Age Security.”  (So the CPP expansion proposed here is no expansion, it is just a trade off of higher CPP payout in exchange for moving CPP start from 65 to 67 and minimally higher mandatory contributions. While this might be a “good idea”, those who want to increase their CPP by delaying its start, already have the mechanism to do it. This is a CPP expansion proposal which is no expansion. For a more impactful cost neutral approach to expand/change the existing CPP system see my Pure longevity insurance payout option in CPP would reduce retirees’ longevity risk where each $1,000/year of inflation indexed lifetime CPP income forgone between ages 65-84, could translate (conservatively) to $16,000/year un-indexed lifetime income starting at age 85.)

Things to Ponder

In the WSJ’s “Bernanke affirms bond buying” Jon Hilsenrath reports that the Fed Chairman Ben Bernanke indicated that he will be continuing bond buying “even as he acknowledged concerns that the efforts might encourage risk-taking that could someday destabilize markets or the economy.”  One senator challenged him that “easy-money policies were sparking a global currency war and creating “faux” stock-market wealth that would be reversed as soon as interest rates started rising. He accused Mr. Bernanke of “throwing seniors under the bus” by pushing down interest rates and reducing their returns on savings and of encouraging people to live beyond their means.” Mr. Bernanke countered that he’s been successful at keeping (official) inflation at 2% and he was “looking out for people who were unemployed”.  And, in the WSJ’s  “Bernanke: Fed must review exit strategy sometime soon” Victoria McGrane reports that the end of QE may be years away and the exit strategy might be to sell the acquired bonds over 3-5 years and hold the mortgage-backed securities possibly even to maturity. The Fed has accumulated $3T of holdings including $1T in mortgage-backed securities since 2008. (Before 2008 we were working with billions, but now we are in trillions.)

And speaking of 2% inflation in the US, in InvestmentNews’ “Investing in a world of make believe” John Browne writes that the “high degree of economic, financial and political uncertainty has resulted in acute volatility in stocks, real estate, commodities and precious metals” which then has been further aggravated by “the increasing skepticism with which the investing public views government statistics and statements”. “For the past 20 years or so, the key assumptions behind the calculation of… key economic indicators, including economic growth, inflation rates, unemployment levels and the real cost and value of money… have been changed or, more accurately, distorted in favor of the government… For the past few years, the Fed has maintained that the U.S. inflation rate has hovered around 2%. Consumers who buy food, goods and services such as health care in the real world will find that figure laughable.”  According to some quoted independent sources tracking inflation the US inflation rate has been 6% since the start of the Clinton presidency, or about three times the Fed’s reported 2%.

In IndexUniverse’s interview “Schiff: Anatomy of an economic train wreck” Peter Schiff argues that, because that US government’s enormous debt, nothing but close to zero interest rates work because “that’s the highest rate we can afford”. Schiff opines that the only way to get back onto a “sustainable track-not a track that takes us over a cliff—we need higher interest rates, lower home prices, smaller government, less regulation, more savings, more production, more exports. We have to do everything opposite of what we’re doing.” He is also arguing that that the dollar will be massively depreciated first but we’ll still end up with high inflation later. Gold will appreciate rapidly as the printing presses roll on. He also recommends buying foreign stocks, emerging markets, natural resource economies to “protect purchasing power and preserve wealth”.

In the Financial Times’ “Sell the currencies of QE offenders” Bill Gross opines that the best way to determine which currencies to sell is by observing quantitative easing “(QE) purchases as a percentage of GDP or outstanding debt and sell the (currency of) the most serial offender or obsessive compulsive printer”. Based on experience to date, Gross recommends the ordered selling of yen, pound with the “euro holding up the rear”. (I guess the US dollar is just behind the pound.)

In InvestmentNews’ “Index giant Vanguard lays out the case for – active funds?” Jason Kephart reports that index king Vanguard makes a pitch for their $350M actively managed funds of their $2T total assets under management: “…Vanguard’s active equity funds have outperformed their respective benchmarks by an average of 88 basis points a year over the past 10 years… The key to the active funds’ success, says Vanguard, is finding top talent at a low cost.” But the actively managed funds have higher performance variability. (Not sure what the news is here other than an attempt to accredit active management in general and discredit indexing/Vanguard in particular. Just because it’s an index fund, it isn’t an automatic buy, the reality is not that good managers can’t outperform indexes, but that they can’t outperform indexes after typical fees charged by active managers, and as usual what Vanguard is bringing here to the table is low cost, so that investor gets a fair share of whatever alpha (excess return) may be captured.)

And finally, following the principle that sunshine is the best disinfectant, you can watch ex-broker Larry Elford’s 18 minute video where he explains the difference between adviser vs. commissioned sales person, the misrepresentation that occurs when salespeople call themselves advisers, the difference between suitability vs. best interest standard” and why you should run the other way if you ‘adviser’ refuses to give you a written statement indicating that the advice you are getting is in your best interest. He also reminds his audience the impact of 2% fees is the loss of half your retirement assets.