Contents: RetirementAction.com  format change, boosting retirement income, retirement ruined by adult children, lessons from “The millionaire next door”, Canada home price increases (mostly) slowing, housing bubble in Canada-yes/no/maybe? Impact of discriminatory property tax in Florida moves into high gear again, choosing a retirement community, pension privatization being undone by some governments, Bank of Canada interest rate reduction rationale challenged, sticking to your plan, pushback on TFSA expansion.

Dear reader,

RetirementAction.com blog posts are in their 9^th year. It’s been a labour of love and learning for me. For over 7-years the “Hot Off the Web” format was interspersed with the occasional in-depth post to address more complex/important specific retirement finance education and advocacy areas ranging from: advisors, fiduciary level of care, accumulation and decumulation strategies, withdrawal rates, insurance products (annuities, life, health, long-term care, etc), asset allocation, ETFs, active vs. passive investing, low-cost investing, pension reform, risk, opportunities of improvement in financial products/services/practices and even discriminatory property tax practices in Florida against snowbirds..

For the evolution of RetirementAction.com I have decided to stop the regular/weekly “Hot Off the Web” format, and will concentrate on occasional special topics.

Thanks to the many faithful readers, who often didn’t just read but also provided comments and articles that influenced my thinking. Many of you have been reading my opinions, analysis and occasional rants for many years. I hope you will continue to do so in this less regular format.

All the best,

Peter Benedek

RetirementAction.com

Personal Finance and Investments

In the WSJ’s “How to pump up retirement income by as much as 30%” Jonathan Clements recommends that if you’re worried about insufficient assets for retirement: higher income earner  should consider delaying Social Security which is “the best annuity that you can buy”, to be safe consider somewhat less than 4% withdrawal from a balanced portfolio, or consider spending the bulk of the assets (75-80%) over the first 20 years of retirement and using the balance to buy a longevity insurance (only available in the U.S. not in Canada) which kicks in during the 21^st year, and if necessary at some point one might even tap home equity (via a reverse mortgage or other more cost effective approaches).

In Bloomberg’s “Your kids are ruining your retirement” Carol Hymowitz writes that “Baby boomers are putting their retirements at risk by spending too much on their adult children. With real wages stagnant and unemployment among those age 16 to 24 running above 12 percent, large numbers of households continue to dole out cash to children no longer in school, covering rent, cell phones, cars, and vacations.”A recent survey indicated that while 20% of U.S. households provide financial assistance to elderly parents, about 31% do so to adult children. “The more boomers put out for adult kids, the less they can put aside for themselves, which is scary as they live longer and need savings to last them into their 80s and 90s.” You need to remember that for each $4,000/year income in retirement you’ll need about $100,000 at retirement at age 65.

In a related article, in the NYT’s “Paying tribute to Thomas Stanley and his millionaire next door” Ron Lieber, triggered by the death of “The millionaire next door” ‘s  author, notes some of his teachings: “Most of the rich grow wealthy because of modesty, thrift and prudence. They live happily in starter homes. They don’t subsidize irresponsible adult children. They have an allergy to luxury automobiles.” But “there were plenty of people who lived in expensive houses with enormous mortgages in high-income neighborhoods who didn’t have much in the way of net worth”.

Real Estate

The February 2015  Teranet-National Bank House Price Index was up 0.1% MoM and 4.4% YoY. During February prices were up in Vancouver (+1.5%) but were down in Toronto (-0.1%), Montreal (-0.6%) and Ottawa-Gatineau (-2.3%); Ottawa-Gatineau dropped -5.2% in the past six months. Over the past year prices increased in Toronto (+7.3%), Vancouver 5.7%) and Calgary (5.6%), but dropped in Ottawa-Gatineau (-1.2%) and Montreal (-2.4%).

Is Canadian real estate in a bubble and is it about to deflate? The Globe and Mail has several articles on the subject in the past week. Tamsin McMahon in  “IMF sounds fresh alarm over Canadian housing market” reports that the IMF is waving red flags about Canada’s housing for assorted reason including an overvaluation of 7% to 20%, and loose lending standards and inadequate regulatory oversight of the financial system; in another article “Housing starts fall sharply to lowest level since 2009”  he reports that new housing unit construction  was down 16% in February from January, with 25% “fewer new condo and multi-residential projects as builders grappled with rising levels of unsold inventory”. However in the Globe and Mail’s “RBC CEO David McKay bullish on Canadian housing” David Berman however quotes an upbeat RBC CEO that housing supply and demand are in balance, there is good economic growth (2.4%) due to lower energy prices and cheaper dollar, there is a shortage of single family homes in Toronto and Vancouver, as well as there is “strong household  formation and strong immigration numbers”.  (According to the Teranet data above, some Montrealers and Ottawans might be feeling their bubble deflating a little.)

In Palm Beach Post’s “Save Our Homes benefit is back, but with new twist” Jeff Ostrowski reports that with increasing Florida home prices Save-Our-Homes (SOH) constitutional amendment’s benefits to Florida homesteaders (residents) are back (homesteaders’ incremental benefits are to be paid by non-homesteaded snowbirds among others). At the peak of the bubble in 2006 $48B of Palm Beach County property was shielded from taxes; this dropped to $6.7B in 2012 and is back up to 16.5B in 2014. SOH “benefits long-time property owners with homestead exemptions. But the cost is shifted to recent buyers of homes, apartment tenants, snowbirds and owners of malls and office buildings.” PBC Property Appraiser Gary Nikolits notes that “The original constitutional amendment said the taxable value of a home can rise by 3 percent or the cost of living, whichever is less. For 2015, the cost of living increase is only 0.8 percent — a rock-bottom rate that means the value of Save Our Homes is almost sure to grow”. (i.e. whenever the taxable value of homesteaded properties fails to keep up with market value changes due to SOH, the non-homesteaders pick up the shortfall in required tax revenue.)

In the NYT’s “Retirement in a community. But which one?” Harriet Edelson discusses some of the considerations in choosing a retirement community: proximity to family/children, sustainable (initial and ongoing) affordability, climate, environment where one would feel comfortable, available services (dining, healthcare), amenities (pool, gym, golf, tennis, walking/trails), access to educational/cultural opportunities, demographics (over 55 or multi-generational), active vs. continuing care communities,  and whatever else you might consider particularly important.

Retirement Income and Pensions

In Bloomberg’s “Countries backtrack on privatizing retirement” Carol Matlack notes that about 30 Latin American and former Soviet satellites started (some as early as the 80s) to privatize their pay-as-you-go (paid for by ongoing workers’ contributions) retirement income systems, by the creation of individual retirement savings accounts which “required workers to contribute a minimum percentage of their pay”. This was supposed to “provide greater financial stability and make pensions less prone to political interference”. Unfortunately it did neither. Places like Chile, Argentina, Hungary and Slovakia after introducing private systems have recently reversed themselves by either reintroducing state benefits, even expropriating pension assets and/or allowing workers to opt out. The problems were due to a variety of reasons including: large proportion of workers were operating off-the-books, returns were much lower than expected, and government expropriation.

Things to Ponder

In the Globe and Mail’s “Poloz rate cut the wrong move at the wrong tome” Paul Gardner challenges Bank of Canada’s Governor Poloz logic on the latest rate cut, the lack of transparency associated with the announcement and the joining of the beggar your neighbour currency depreciation phenomenon in the world. He challenges the need, the timing, the likely impact on Canada’s housing market and growing personal debt in the country. He accuses the BoC Governor of “still behaving as the ex-CEO of Export Development Canada (EDC), which required a very different set of actions. He needs to start being the Governor of the Bank of Canada.” (No doubt that there are many who’d agree with that assessment, especially many retirees who were given another haircut on their new GICs.)

In ETF.com’s “Rule No. 1 is stick to your plan” Olly Ludwig interviews Bill Bernstein on: future returns baked into current valuation (about 2% real on a balanced portfolio if you keep costs very low), factor or smart-beta investing (value in particular, but also small-cap and momentum have done well in the past decade- but no guarantee that they’ll always do so), risk management (you must have a plan and stick to it), the way to get rich (“working hard; not spending a lot of money and saving. The name of the game is not to get rich. The name of the game is to not die poor. And the way you avoid dying poor is just by adhering to your strategy.”), emerging markets (cheapest part of one’s portfolio now, but China is problematic).

And finally, in the Globe and Mail’s “TFSA criticism is premature, misguided” Gordon Pape writes that the TFSA is under attack on a number fronts: the CRA doesn’t like large TFSA accounts, and in the past month two reports argued that the wealthy are the primary beneficiaries of TFSAs and are “posing a serious threat to future government revenues”. The attack comes just before the coming federal election in which the Conservative government was expected to re-commit to the pledge of doubling the allowable TFSA contribution. Pape disagrees. Similarly, Ian Russell in the Financial Post’s “TFSA criticisms miss key points: The benefits of the most popular savings tool ever” also disagrees with the Parliamentary Budget Office and Broadbent Institute that the wealthy benefit disproportionately or that the tax-revenue loss associated with a TFSA increase is significant. (If as the reports argue that no new savings would be stimulated, but people would just redirect funds intended for RRSPs into TFSA, then generally speaking the government would get its pound of flesh one way or the other, the primary difference being the timing of when the revenue is received. For those concerned about lower future RRSP/RRIF derived tax income if more people use TFSAs instead (increasing tax revenue now at the expense of lower future revenue), the government doesn’t have to spend the windfall/excess tax income received now by a switch from RRSP to TFSAs, instead they could choose to invest excess to generate future government income. And by the way, the tax rates are not cast in concrete either, as illustrated by the effective 55-60% rate levied on income when OAS-clawback kicks in, which is a lot more frequent than expected as a result of minimum withdrawal requirements from RRIFs. All in all a higher TFSA limit would be a good thing, even if accompanied by a reduction in the RRSP limit.)