Contents: Estate planning, portfolio rebalancing, Canadian investors are losers, mandatory RRIF rules, robo-advisers in Canada, Florida snowbirds’ property tax alert, longevity insurance option added to 401(k)s! CPP based Ontario pension plan high cost- but doesn’t have to be, PBGC warns on pooled pension plans, EPI better reflects everyday inflation than CPI, volunteers needed for UK eldercare, “data mining’ and backtesting”, hedge funds highly correlated to market, the end of retirement.

Personal Finance and Investments

In the Globe and Mail’s “Estate planning: Three types of documents you’ll need” Tim Cestnick in a follow-up to his first of a number of articles on estate planning, in which he defines the five steps of estate planning as : define (the who and how much will they receive), design (the how and when it will be executed for: tax minimization, asset management, timing and protection of transfers especially to children, etc),document (will, POAs and necessary personal info, and to come in a future article the discuss and distribute parts.

In the WSJ’s “How to rebalance your portfolio” Brett Arends explains that the benefits of rebalancing are two-fold: lowering risk and boosting returns. Typically the need for rebalancing is driven by the desire to maintain a target risk level (asset allocation) for one’s portfolio. But the other, less discussed, benefit of rebalancing is that one is forced to sell some appreciated/expensive assets classes and buy instead some on-sale/cheaper asset classes. Arends’s bottom line “It is wise to rebalance periodically. Doing it quarterly may be best, but those who rebalance once a year may not miss out on much of the benefit—or any at all.” (There are various schools of thought on the frequency and timing of rebalancing, but there is mostly unanimity that it should be done.)

And speaking of rebalancing in the Globe and Mail’s“Options grow for DIY investors looking for a little help”Rob Carrick reports on a new entry, ShareOwner, in the space between investors with an advisor and Do-It-Yourselfers. They will invest your money into one of their model portfolios for an annual fee of 0.5% of your balance with a $40/month cap for larger than $100,000 portfolios, this essentially covers  investing in the ETFs underlying one of their model portfolios (or even one customized to your specification) and rebalancing monthly to the target allocation. The cost of the underlying ETFs is additional. The total cost, including ETF management fees, is estimated to be about 0.79%/year (lower over $100K) and there is no advice provided. The article notes that BMO InvestorLine has a similar service, adviceDirect, for 1% (though it may come with a little more handholding and total cost is not capped for portfolios above $100,000)

In Huffington Post’s “Canadian investors are (mostly) losers” Dan Solin opines that there may be much to admire and emulate about Canadians, but investing is not one of them. He then proceeds to explain that despite data that been around for decades indicating that it is stupid to do so, 90% of Canadians choose an actively managed mutual fund which typically charge 2-2.5% in fees when they invest, despite the availability of passive/indexed ETF which outperform. (Solin is even more blunt than I have been; the message is simple don’t buy mutual funds!)

In the Globe and Mail’s “The ABCs of mandatory RRIF withdrawals” John Heinzl explains very simply the mandatory withdrawal aspects of RRIFs, and points out that having to sell assets is not one of them; specifically he points out that “you can transfer shares “in-kind” from your RRIF to a non-registered account. That way, you’ll maintain ownership of the shares”. He also covers: the specific minimum percent withdrawals at each age (4% at 65, 7.85% at 75, 10.83% at 85 and 20% at 94), that RRIF withdrawal rates can be triggered off the younger of a couples’ ages, a withholding tax will be applied on the excess of the minimum withdrawal requirement and of course all withdrawals are taxed as income. (The mandatory withdrawal rates have been set in motion in a dramatically different context as explained in a recent C.D. Howe report; unlike then, today we have increased life expectancies and much lower interest rate environment, and with an almost balanced budget a lesser need for immediate tax revenue by the federal government. The other reason to reduce or eliminate the mandatory minimums is to remove this as an obstacle to insurance companies offering pure longevity insurance from registered funds, as the U.S. has just announced for 401(k)s-see below in Pensions and retirement income section)

Real Estate

In the Palm Beach Post’s“Palm Beach county tax base grows for third straight year”Joe Capozzi reports that while still 20% below the 2007 peak, the county’s tax base increased the third year in row. Garry Nikolits the County’s property appraiser notes that “If you were to trend the values from back in the late ‘90s to current, we are probably where we should have been if we’d had normal market conditions all along.’’ There is a 7.4% increase in the county’s taxable property value to $139.6B. (Non-homesteaded property owners (snowbirds) should start saving for a potentially significant property tax increase. Time will tell what the increase will look like, but 7.4% increase in base with most of the residential property homesteaded and capped by inflation, non-homesteaders will face increases closer to10 % unless the unlikely eventuality that mil rates will drop.)

Pensions and Retirement Income

In InvestmentNews’ “Treasury allows longevity annuity in retirement plan” Darla Mercado reports that the U.S. Treasury department announced that in recognition of the difficulty “for an individual who doesn’t know his or her future life span to deal with, (and in order to help) to manage the risk of running out of assets while they’re in retirement…” deferred income annuities (longevity insurance) will be permitted inside 401(k)s. “The Treasury’s so-called qualifying longevity annuity contracts final rule, effective immediately, would exclude the annuity’s value from the account balance that’s used to determine the RMD…savers can use up to 25% of their account balance or $125,000 — whichever is less — to buy a qualifying longevity annuity.”  Bloomberg’s “Betting on getting to 80: Draw $40,000 a year forever, if you don’t die first” provides more details. (Longevity insurance is not available in Canada outside or inside an RRIF. When is this going to be available in Canada-does the government understand the criticality of such a capability especially for boomers now entering retirement; does anyone even care???)

In the National Post’s “Costs are high for proposed government-run pension plan in Ontario” Andrew Coyne argues that you can do it yourself cheaper than the CPP, on which the Ontario pension plan will be modelled. He argues that CPP costs are about 1% of assets, which is a lot cheaper than Canadian mutual funds whose investors he rightly call suckers, but more expensive than his ETF based portfolio costing about 0.19%. Coyne indicates that CPP costs have doubled since four years ago and are up seven-fold since they switched to active management. So he is opposed to the Ontario government‘s expanded CPP program because it will be copying the CPP model. (There are other problems with the CPP, like Canadians are paying 9.9% for about 6.5% of benefits due to catch-up, and that with private equity and real estate which now represent a significant portion of the CPP assets there may be valuation challenges. But there are also a few problems with Mr. Coyne’s perspective. As you know, while I am not a fan of the expanded CPP, but the Ontario pension initiative is better than the inexcusable inaction of the federal government on pension reform. But, not everyone has Mr. Coyne’s discipline to save without some coercion and/or the confidence to then invest appropriately. Also, the CPP model includes an indexed annuity which you can’t otherwise buy in Canada. Furthermore, I have not heard that Ontario has committed to active management, so the investment management costs may be dramatically lower than the CPP’s. In fact if Ontario’s pension plan could ride on top of the CPP’s administrative (not investment) infrastructure (and I can’t see any reason why not), the overall all-in-cost could come in at under 0.3% for the Ontario plan.)

In the NYT’s “Insurer warns some pooled pensions are beyond recovery” Mary Williams Walsh writes that a new Pension Benefit Guaranty Corporation report indicates that over one million multiemployer pension plan members are at risk of “losing their federally insured pensions in just a few years” unless Congress acts by presumably allocating additional funds. “The federal insurer has a separate program for the pensions offered by single companies, and the report said it was not at risk… Giving it (PBGC) the means to rescue failing multiemployer pension plans now would almost certainly require an act of Congress to put more money into the agency’s coffers.”

Things to Ponder

In Bloomberg’s “How to beat inflation: Skip kids, cars and getting old” Ben Steverman discusses U.S. how inflation has risen to 1.8% in May YoY, just shy of the Fed’s 2.0% target. We’ll get a better picture on whether this is just noise or a trend when the June number is available.). The article discusses the un-representativeness of this official inflation number and how according to a new report  “rising costs for certain necessities make many Americans’ personal inflation rate much higher”. The report focuses on the EPI (Everyday Price Index) which focuses on frequently bought items. The EPI up 0.5% in May and 2.5% YoY has risen faster than the CPI. The report also discusses other inflation models beside the CPI and EPI, such as Urban Renter, Mr. And Mrs. Wise (seniors) and Educated Family.

In the Financial Times’ “Society must help state with elderly care” Sarah Neville reports that Britain’s “care and support minister” says that “The state and modern families are unable to cope with the soaring numbers of elderly people in Britain’s “neglectful society” and volunteers will have to step in to help”. The article discusses the much discussed demographics changes in progress and the impact of the “dispersal of the extended family”. (Strange on many levels…)

In the WSJ’s “Huge returns at low risk? Not so fast” Jason Zweig discusses “data mining” (digging into past data until some pattern emerges), but he notes that ”Given long enough time and deep enough data, you can find a seemingly impressive linkage between almost any two factors. But correlation isn’t causation.” Similarly “backtesting” strategies can be “legitimate” but you can’t rely on them as there often are “false positives” “caused by luck alone”. (So don’t bet the bank on it!)

In the Financial Times’ “Hedge fund correlation risk alarms investors” Steve Johnson writes about the rising/high (93% or 84%, depending on who is counting) correlation between hedge funds and equity markets and raise questions about the high hedge fund fees when you can get very cheap beta. Hedge fund managers suggest that just because equities and hedge funds have both done very well recently, correlation doesn’t mean causality

And finally in the Time.com’s “2030: The year that retirement ends” Rana Foroohar discusses the coming personal “Retirement apocalypse and what we have to do to avoid it”. The article also discusses how after 30 years of pushing responsibility to the individual, government is starting to involved again (e.g. California and other states) and the tremendous “resistance from the Securities Industry and Financial Markets Association (SIFMA), a trade group for securities firms and asset managers”. Among the solutions mentioned is the “return to a once common multifamily structure”. (This latter approach was also discussed in the Financial Times article mentioned above about society having to help government with eldercare.)