Contents: Assets adequate for retirement? 1% adviser fee- next pin to fall? RRSP traps, Canada’s house bubble? Bank of Canada rate surprise-adding more air to the housing bubble? UK pensions: mandatory annuitization stopped- is annuity cash-in option next? will pension fund managers come clean on charges? Lieber: don’t buy Tony Robbins’s annuity pitch, Canada’s health system on the precipice, forecasting is difficult.
Personal Finance and Investments
In the WSJ’s “How to tell if your retirement nest egg is big enough” William Bernstein suggests that “when you’ve won the game, stop playing” and defines winning as having accumulated “enough assets to provide your basic expenses for the rest of your life”. His formula is: gross up your annual expenses for taxes, then subtract Social Security and other pension income, (This number he call residual living expenses or RLE) and then multiply RLE by a factor of 25/20/17 at ages 60/65/70, respectively. If you achieved this asset target, then he advises a reduction in portfolio risk; i.e. don’t take more risk than you need to. He then argues further that historical data suggests that a 65 year old with assets just 20xRLE should limit portfolio allocation to 50% stock, whereas one with 35x and 50x RLE can go as high as 70% and 100% stocks, respectively. (I come at the stock allocation question from another direction, and test whether I can tolerate a 50% drop in my risky assets and still meet my annual (fixed) expenses after tax and net of pensions (RLE) using a safe sustainable withdrawal rate. It comes to a stock allocation in the same ballpark, but of course still doesn’t guarantee that it is bulletproof. While Bernstein doesn’t explicitly state what safe withdrawal rate he’d recommend, he seems to be using 5% in his examples which I would consider overly aggressive for a 65 year old couple who has 75th percentile joint life expectancy of close to30 years. )
In the WSJ’s “It’s time to end financial advisers’ 1% fees” Jonathan Clements opines that just as the shift from portfolio’s being constructed based on passive vs. active components has dropped investment management costs dramatically, is it time to end “the standard 1% of assets charges each year by many financial advisers”? Clements figures that advisers will resist cutting their fees; instead they’ll beef up the included services like ”detailed advice on estate planning and tax issues, as well as full blown financial plans”. (The business models for advisers are about to be revolutionized. Those who will provide real value for fees and do so with the peace of mind that comes with a fiduciary level of care will be the winners; let’s hope so. Of course, those who will educate themselves financially sufficiently to be mostly DIYs will have the opportunity to reap even greater benefits.)
In the Globe and Mail’s “Don’t fall into the RRSP ‘tax-trap’” Simon Avery discusses the impact of taxes on accumulated RRSP assets due to the corrosive impact of the Old Age Security clawback. The best time to start managing this is before age 71 after which one loses flexibility due to the minimum withdrawal requirements from RRIFs; the effect is the same when a retiree needs additional income from a RRIF to meet larger than usual expenses. Individuals should consider diversifying their retirement savings to include TFSAs and taxable accounts, as well as possibly start withdrawing from RRSP/RRIFs before age 71 especially in years when their marginal tax rates are lower. (After all the whole point of RRSPs was to save/invest pre-tax dollars during working years when marginal tax rates are high, and withdraw during retirement when marginal tax rates might be lower; if the assumption of lower tax rate in retirement is invalid (including the impact of OAS clawback) then you would have been better off to do your retirement saving with after-tax dollars. By the way, you can get trapped with OAS clawback rules even when you are careful; when trying to reduce size of your RRSP/RRIF before age 71 by making non-mandatory withdrawals, if you simultaneously trigger capital gains which would otherwise be offset by earlier capital losses, you might be in for a surprise since the capital losses appear to be disallowed for clawback calculation.)
In CBC.ca’s “Overvalued housing prices and how to read them” Don Pittis discusses whether Canada’s house prices (using a collectible card analogy), are in bubble or no-bubble territory, how supply is gobbled-up, speculation as an expectation of sufficiently rapidly rising prices for buyers to conclude that it is rational to make a bet that they can’t otherwise afford. Historically, property prices were 3-3.5x income, compared to current 10x in Vancouver and 7x in Toronto. (This is probably from the latest “11th Annual Demographia International Housing Affordability Survey” (which) “covers 378 metropolitan markets in nine countries (Australia, Canada, China, Ireland, Japan, New Zealand, Singapore, the United Kingdom and the United States)”) Another exceeded indicator mentioned in the article is average shelter-cost-to-income ratio (ASTIR) which compares carrying cost (including taxes heat, electrical, insurance, and presumably mortgage, etc) which is supposed to be below 30% of gross income; should 5-year mortgage interest rates increase by 1-2% from current levels, this would push people into potentially unsustainable levels. (Another bubble signal is the growing volume of popular-press stories on the subject.)
But Canadian interest rate increases don’t seem to be imminent. In fact Bank of Canada’s 0.25% rate cut to 0.75% is reported in the Globe and Mail’s “Oil’s threat vs. household debt: Poloz’s delicate balancing act” to be ““unambiguously good” for the Canadian housing market, particularly outside Alberta, said Toronto-Dominion Bank economist Diana Petramala. Consumers seemed to echo that sentiment yesterday, with real estate brokerage Zoocasa reporting that traffic to its online listings website jumped 20 per cent after the bank’s announcement.” Not surprising, since this rate drop is expected to translate into cost savings “for the roughly 30 per cent of home buyers with short-term or variable-rate mortgages.”
Retirement Income and Pensions
In the Financial Times’ “Annuities cash-in idea has ‘potential’, says insurer” Josephine Cumbo writes of a new UK proposal whereby in the interest of fairness, “pensioners would be able to sell their annuity income to a buyer such as an insurance company for a cash lump sum”, after ending recently the long time requirement for mandatory annuitization upon retirement. (I guess insurance companies will have another shot at profiting from asymmetric information in dealing with retirees; all in the interest of fairness.)
In the Financial Times’ “Fund managers must stand up and be counted on charges” David Pitt-Watson discusses the opaque charges associated with pensions and its impact in retirees’ income; the difference between an annual cost of 0.5% and 1.5% over a working lifetime translates into a 38% lower retirement income!. He notes that many of the costs charged are hidden and others are made invisible by using spreads, yet they are all paid from our assets. He challenges the investment industry to insure that all costs are made known to clients. (Good luck with that!)
And Ron Lieber in the NYT’s “Slippery tips on annuities from a life coach? rips into Tony Robbins’s new book and suggests that you should not waste your time or money on it. Tony Robbins appears very high on assorted annuity products which offer “upside without the downside” (I think we’ve heard this before!). Lieber concludes that “the word that people in technology circles use for coming-soon offerings like Mr. Robbins’s best-of-everything annuity is “vaporware.” I hope it will one day emerge from the ether and do all it promises to do. But I don’t know if I would bet on it.”
Things to Ponder
The Globe and Mail’s opinion piece entitled “When a stagnant health system meets an aging population, disaster awaits” reports that a recent CMA survey indicates that 80% of Canadians are worried about access to health services as they age, 75% worry about the cost of services not covered by medicare, and 61% are sceptical that hospitals and LTC facilities will be there to meet the demands of the coming wave of aging population. The problems are already visible, even before the “silver tsunami” has “made landfall”. The CMA is calling for a “national seniors strategy”. The article further notes that “Most Canadians would probably be a little shocked to hear that their country is no longer the international darling of universal health care… Out of 11 countries, ours is ranked 10th by the Commonwealth Fund… The U.S. habitually takes the 11th spot, but we’re right there behind them.” Of the 11 developed countries compared, “Canada has the worst “timeliness of care” and the second-worst overall efficiency… We have the longest wait times in emergency rooms”. Furthermore “15 per cent of acute-care beds in Canada are filled with aging patients who should be released into the care of family or placed in a long-term-care facility.” This warehousing of the aged, one third of who have dementia, in $1,000/day hospital beds instead of $130/day in a LTC facility or $55/day at home must be addressed before the “silver tsunami” arrives, which we know that it is coming and when it is coming.
And finally, in the Globe and Mail’s “No one can predict the future- not even financial advisers” Tom Bradley writes that “talking about where the market is going is investing’s lowest common denominator. It’s like talking about the weather, except it has less chance of being right.” He argues that “Investment professionals want their clients to believe that they know more than they do; the media want readers to care about the daily news flow; and investors, who naturally want to grow their money, not lose it, are constantly fighting the twin demons of fear and greed.” Bradley recommends that you set your long-term asset allocation and then “stick to it by using contributions and withdrawals to rebalance your portfolio”. (Sounds like good advice. Financial or economic forecasting is just financial pornography. The only possible value in listening to forecasters is that their forecast might be a source of scenario building for your risk management strategy.)