Contents: LTC planning not insurance, work till 75? retirees’ dumb moves, health insurance abroad, healthcare costs in (Canadian) retirement, 4% withdrawal rule unrealistic (Duh…), Green’s Gone Fishin’, GenXers’ financial priorities, getting value from an adviser, prepare “If something happens” binder, US house prices up 11% for year but down 0.3% in quarter, Shiller: losing optimism on house prices, Canadian snowbirds refocusing on renting? retirement quality indices? create your own pension, pension reform options, realism in (US) public pensions, bond investing myths, the dividend trap, investor mistakes, Buffett: don’t turn liquidity from benefit to curse! index construction, real GDP growth since 2007: US 6.5% vs. China 66%, currencies: a collective delusion.
Personal Finance and Investments
In CFA Institute’s “Long-Term Care planning: Five common mistakes” Lauren Foster discusses the need for advisers to discuss with Boomer-aged clients provisions for dealing with extended health care issues. Two most common but perhaps conflicting client stated desires are “not wanting to be a burden the family” and “wanting to stay at home”. These objectives necessitate planning, but it is about “long-term care planning, as opposed to long-term care insurance”. Included among the five most common mistakes are: procrastination, denial “that it could happen”, underestimating the impact on the family and cost of care.
In the Financial Post’s “Why working to 75 is something we should all consider” Ted Rechtshaffen reports that StatsCan data points to about half of the 55-65 year old retired individuals returning to work for financial or other reasons. suggests With life expectancy (or median years spent in retirement) having increased about 30% since 1975, Rechtshaffen argues that retiring at 55 is “dead because many would struggle to finance a retirement that will last 30 plus years, but also dead because many people are realizing that they don’t actually want to be retired for 30 years.”
In the WSJ’s “Five really dumb money moves retirees make” Tom Lauricella’s list for blowing one’s retirement nest egg includes: spending a large amount at start of retirement, no emergency reserve, forgetting that there is “no free lunch” and “reaching for yield” (a particularly dangerous “free lunch”).
In the NYT’s “The dream of moving abroad in later life, with good health care” Tim Gray explores health insurance considerations for those who would like to snowbird or move abroad in retirement. The article mentions: several insurers (HTH/GeoBlue, Cigna and Allianz Worldwide Care) and expat group insurance options (e.g. Association of Americans Resident Overseas) which can be used to secure policies, the fact that the insurers “individually assess applicants for international medical policies”, whether you also need coverage in your home country (i.e. U.S. or Canada), and the various types of available policies (broad vs. narrow, HMO-type, or some might choose if available a local government national health care option).
In the Globe and Mail’s “Will you have enough money to cover healthcare in retirement?” Rob Carrick discusses the explicit need (even in Canada) to plan for healthcare expenses in retirement. Despite some of the associated vitriolic comments about this article (which appear to now have been removed), what this article reminds readers is that, while you are working generally your employer picks up much of the tab for healthcare expenses by providing some form of insurance, the cost of which is not explicitly included in your income. This point is important and not just in questioning the 50-70% income replacement ratio for retirement financial planning. It suggests that in your planning for retirement expenses, you better include an explicit line for healthcare expenses. (More than a decade ago as I was discussing with my accountant my retirement finances, he suggested to my surprise that I should consider a $15,000 annual allocation to medical expenses despite currently being a beneficiary of Canada’s more or less “all-inclusive” and “free” health care system. A good place to start with might be to allocate $4,000-$5,000 per year which the equivalent to (but not necessarily) buying a minimal supplemental health insurance policy in Canada for a couple in their 60s with fairly low caps, i.e. more like a prepayment of expenses type of policy. However this does NOT mean that one should run out to buy health or long-term care insurance!)
In InvestmentNews’ “4% withdrawal rate in retirement unrealistic in real world, researchers say” Darla Mercado reports that in a new JPMorgan paper entitled “Breaking the 4% rule” in which they suggest that the traditional 4% rule (i.e. 4% in year 1 then dollar amount adjusted annually for inflation) may not be best (or even realistic) in the real world and they instead propose a “customized optimal asset allocation and withdrawal rate at each age” driven by “five factors: the individual’s preference for withdrawal magnitude and withdrawal timing; the level of wealth and (other) lifetime income; the current age and life expectancy; market randomness and extreme events; and the dynamic nature of the retiree’s decision-making process on how to spend the money in light of market performance.” (Yes, adaptability to changing environment/needs/ circumstances is more sensible than assuming/expecting that one can set-and-forget constant inflation adjusted withdrawal amount and carry on with it until death. I plan to look at the JPMorgan paper in more detail shortly.)
In my earlier this week’s blog post “The gone fishin’ portfolio: Get wise, get wealthy…and get on with your life” by Alexander Green you can get a taste of Green’s 2008 book which is a quick and informative read about how one might build a one-size-fit-all portfolio which only requires 20 (?) minutes a year of maintenance. Worth a read even if not everyone would agree that: such a risky portfolio is appropriate for everyone (age 25 or 65), with the specifics of the portfolio allocation and/or that risk tolerance is irrelevant in setting asset allocation especially near/in retirement.
In the Globe and Mail’s “Ahead of RRSP deadline, a financial priority list for GenXers” Shelley White looks at where RRSP contributions should fit in GenXers’ (born between mid-60s and mid-80s) priority list: (1) Life and disability insurance, (2) high cost debt, (3) RESPs (to benefit from 20% up to $500 government match), (4) RRSP/TFSAs. Article makes other interesting points (…however many would argue that RRSPs should come before the RESPs, especially when there is an employer match involved.)
In the Globe and Mail’s “How to get value from your financial adviser’ Preet Banerjee argues that picking a financial adviser is more challenging than selecting a doctor/lawyer since the latter usually come with appropriate educational background whereas “to call yourself a financial adviser in Canada, you could have little more than a few weeks of self-study”. He suggests some important questions to consider like: focus on planning vs. product sales, fee/cost transparency, appropriate financial educational background; and make sure s/he covers risk management, budgeting, debt management and tax planning. Also interview at least three candidates and get references as well.
CARP’s “The “If something happens” binder” has a list of items that you should create and keep up to date so that you save a lot of problems for your loved ones should something happen to you. (Well worth a read, then followed by implementation action; this also serves as a reminder to update the list we may have prepared some years ago.)
The just released December 2013 S&P/Case-Shiller Home Price Indices “showed that National home prices closed the year of 2013 up 11.3%…In the fourth quarter of 2013, the National Index declined 0.3%…gains are slowing from month-to-month and the strongest part of the recovery in home values may be over… Recent economic reports suggest a bleaker picture for housing. Existing home sales fell 5.1% in January from December to the slowest pace in over a year.” The index level is back to spring 2004 level. All 20 cities had positive YoY increase but “Only six cities – Dallas, Las Vegas, Miami, San Francisco, Tampa and Washington – posted gains for the month of December”.
In the WSJ’s “Home prices in 2013 notch biggest annual gain since 2005” “Nick Timiraos also includes “Change since peak” chart for a few cities which shows that while some cities (e.g. Dallas and Denver) have now surpassed their previous peaks, most are still well below the market peak, and some are still well over 20-45% below (LA, Detroit, Phoenix and Las Vegas) peak; the National level is also still 20% below peak. (Remember that a 50% drop in prices requires a 100% price increase to recover the loss!)
In the Globe and Mail’s ” “Shiller on housing: ‘Losing our optimism’” Robert Shiller is quoted as being “concerned that home prices aren’t recovering much after taking inflation into account”, “traffic of prospective home buyers…and building permits of single family homes are both slowing down”, and surveyed home buyers’ expectations of house price increases over the next decade are now trending to 3%/year compared to 12%/year during the boom. A few months ago he expressed concerns about the then rapid price increases, whereas now he is wondering if we may be near a turning point similar to 2006?
In the Palm Beach Post’s “Price hikes slower but steady in South Florida real estate” Kimberly Miller writes South Florida prices are back to May 2004 levels with December prices up +16.5% higher than a year ago. In Palm Beach County inventories are at 5.5 months, prices at $255K up 17% for the year.
In the Financial Post’s “Canadian snowbirds’ dream of U.S. vacation home fading fast” Garry Marr referring to a TD report notes that the enthusiasm and affordability of Canadian snowbirds is decreasing with the weaker loonie and higher U.S. home prices. While the demographics will continue to drive the numbers desiring a snowbird lifestyle, “we see renting becoming an increasingly preferred option”. (And that’s certainly has been and still is a sensible decision in Florida context if cost of buying vs. renting has anything to do with it!)
Pensions and Retirement Income
For those of you who care to wade through indices and sub-indices and their construction, you might find of interest “Who is most ready for retirement? Not Americans”, “Natixis Global Retirement Index” and “Switzerland takes top honours for retirees’ quality of life” discussing an index which purports to “measure the nations’ suitability and convenience for retirees. A perfect score of 100% would represent a country with an outstanding healthcare system; a very high level of material wealth; a sound financial system offering high rates of return; and a very high quality of life, a well preserved environment and low levels of pollution.” For what it’s worth Switzerland is #1, Canada #14 and the U.S.A. #19; the top 10 are all west European countries except for Australia and New Zealand. For what these indexes are worth, a UN study supposedly measuring “the best places to grow old” last year reported on by the Financial Post’s “Canada ranks in top 5 of world’s best places to grow old” put Canada at #5 and the U.S. #8 with the top four countries being Sweden, Norway, Germany and Netherlands. (Canada’s high ranking was on the back of the universal healthcare system in the country. At least the studies are in agreement and give European countries top rating.)
In WSJ’s “Retiring on your own terms” Jason Zweig discusses CFA Institute Financial Analysts journal article entitled “A pension promise to oneself” in which Sexauer and Siegel indicate that to generate an inflation indexed $100,000 annual income excluding Social Security starting at age 65 and increasing with inflation for 20 years, then from the 21st year continuing for life at the same nominal level as the 20th year, you need $2.2M based on a retirement multiplier currently at 22. This self created pension, which can also be used as a benchmark, is built with a laddered portfolio of TIPS payments and a deferred annuity (pure longevity insurance-which is still unavailable in Canada-pity) starting at age 85. Looking at the question in reverse, in that what you could buy for a single $100,000 payment at age 65 is given at “DCDBbenchmark.com” and updated monthly. The savings rate required is very high for such an (essentially) riskless implementation, but those willing take more risk during accumulation might need lower savings rates to achieve the $2.2M objective, but then a risky strategy might also lead to a lower return then requiring higher savings later for the same required $2.2M implementation. (I will try to summarize the FAJ paper in the next week or so to get a better handle of the very high savings rates involved.)
In BenefitCanada’s “Mandatory provincial pension could make retirement more secure” staff article reports on a Fred Vettese paper “Filling the pension gap” in which he argues for a government run mandatory pension program which delivers a gross income based net replacement ratio (a standardized percentage of disposable income) aiming for 100% replacement at $25K gross income, 90% at $40K, 80% at $60K and 70% at $85K. “This assumes that members of lower-income households—which often do not have additional funds to contribute to RRSPs, for example—are supplemented in full. Meanwhile, members of higher-income households are likely contributing to such additional voluntary savings.” He also notes that with these two groups representing 32% of Canadian households his proposal target 68% of the families. Currently only 21% of the private sector employees have pension coverage in Canada (vs. about 85-90% in the public sector. Perhaps he carved out this 68% and the target replacement ratios to try to address Mr. Flaherty’s concerns on the potential economic impact of such a mandatory program. No doubt we’ll see many other proposals now that Ontario is considering a supplementary plan.)
On the U.S. pension front in the NYT’s “Panel seeks greater disclosure of pension health” Mary Williams Walsh reports that the (American) Society of Actuaries wants to provide “more precise, meaningful information about the health of all public pension funds would give citizens the facts they need to make informed decisions…(specifically) the fair value of pension obligations and estimates of the annual cash outlays needed to cover them…(i.e.) the plan’s total liability, discounted at a risk-free rate.” (No doubt this will go down like a lead balloon with municipalities/states/unions, so it is likely just a first shot in a coming war to provide the necessary transparency on the real state of public pension affairs.) The Economist’s “The Detroit precedent” discusses the mechanics of how current U.S. public sector pension plan numbers are often fudged using expected return rate based discount rates, arguing that “It is easy to assume, with a public pension, that any shortfall can always be made good later; that the local government will always be around. But the Detroit case shows the dangers of that reasoning.” The current Detroit bankruptcy workout proposes a larger haircut for bondholders than pensioners. Pensioners argue that pensions should be inviolate but then the liabilities should be discounted at risk-free Treasury rates thus forcing the public entities to deal with the true size of liabilities, as proposed by the previous article.
Things to Ponder
In the WSJ’s “Five myths of bond investing” Jason Zweig’s list of myths includes: bond holders will incur “huge losses when interest rates rise” (an instantaneous almost 4% rise in interest rates would be required for a 20% loss in Barclays US Aggregate bond index given its 5.6 duration), “investors who need income must own “bond alternatives”” (“investment is either a bond or it isn’t. And if it isn’t, then it either belongs somewhere else in your portfolio or nowhere at all.”), “municipal bonds are safe diversifiers for a stock portfolio”. (So keep in mind the purpose of the bond/fixed-income side of your portfolio; it is there to stabilize your overall portfolio, so don’t jeopardize that.)
And speaking of “bond alternatives”, ETF.com’s “Swedroe: The dividend ETF trap” Larry Swedroe looks at valuation of a couple of popular dividend strategy funds and compares them to value funds based on P/E, P/B and P/CF indicating 25-100% higher valuations. Capital gains also have tax advantages over dividends. As valuation matters to expected future returns, “The higher the relative price, the lower future expected returns…The bottom line is that you shouldn’t get caught up in the hype of dividend-related strategies.”
In ETF.com’s “Why investors repeat mistakes” Alan Roth discusses reasons why investors don’t learn from their mistakes. In it he relates a chat with psychology professor Dan Ariely in which he said “When you make an investment decision, ask yourself if you know something the market doesn’t know. If the answer is no, then guess what? You’re actually following the herd, and that typically ends poorly.”
In Bloomberg’s “Buffett warns of liquidity curse, celebrates property bet” Tracer and Buhayar report that Buffett suggests that “Investors should treat their equity holdings like real estate purchases, focusing on the potential for profits over time rather than short-term price fluctuations…For these investors (whose psychological makeup drives to act on the latest stock price changes), liquidity is transformed from the unqualified benefit it should be to a curse.”
I you are interested in how indexes are constituted, you might want to read the Dan Weiskopf interview with Chairman of the Index Committee of S&P Dow Jones Indexes David Blitzer in ETF.com’s “Structure matters: Blitzer on index changes” where you might get additional insight on how indexes are created, how stocks/bonds of companies enter exit an index and his view on “smart beta”.
Some startling statistics in the Economist’s “Uneven recovery” where the Buttonwood column reports findings of a Credit Suisse note on the “extent to which real GDP in various countries was above or below its level in the fourth quarter of 2007”. The U.S. is up +6.5%, Germany is up +4.0%, Euro Area is down -2.1%, Italy -8.5% and Greece -23.5%. “By contrast, the Chinese economy is 66% bigger than it was at the end of 2007 and India is 45% larger. Power is shifting east.” The article tries to understand the root cause of the differences in recovery rates but no obvious explanations emerge.
And finally in Bloomberg’s “The Bitcoin collective delusion” Barry Ritholz calls various paper and digital currencies a “collective delusion” and notes that with the collapse of Mt Gox somebody managed to steal 6% of Bitcoins in circulation. He concludes with “Perhaps with the exception of barter, any system that relies on a medium of exchange is a form of collective delusion. How we interact with it, and what we do in the face of this collective delusion’s strengths and weaknesses will determine the way we make future financial plans.” (The more I think about it, the more uneasy I become.)