Friday, February 15, 2019

Short Takes: Low-Income Retirees, Not for Profit Credit Counselling Debt Collectors, and more

Here are my posts for the past two weeks:

Emotional Money Choices

CPP and OAS Breakeven Ages

Here are some short takes and some weekend reading:

Preet Banerjee and Liz Mulholland appear on TVO to discuss financial realities and strategies for low-income retirees. Preet also interviewed the team from Passiv who offer a service to keep your DIY portfolio at a discount brokerage balanced for only $5 per month.

Doug Hoyes and Ted Michalos say that not-for-profit credit counselling agencies are now just debt collectors funded by lenders. I’d be happy to read a rebuttal, but they make a very compelling case.

Canadian Couch Potato gives us a new Excel spreadsheet for rebalancing portfolios of ETFs. The new feature is that it handles ETFs that consist of more than one asset class, such as the new all-in-one ETFs. This spreadsheet will certainly help DIY investors, but I prefer to use Google spreadsheets because they can look up stock prices. I just have to record changes in the number of ETF units rather than enter dollar amounts every time I want to rebalance.

Andrew Hallam makes the point that the currency an ETF trades in doesn’t affect the performance of its underlying investments. I’d go even further. If you buy Canadian stocks, you’re making less of a bet on the Canadian dollar than it seems. Same applies to buying stocks in other countries.

Wednesday, February 13, 2019

Emotional Money Choices

My wife and I are savers, and I like to think we make mostly rational financial choices. But there are a few less than rational things we do with money that make us happier. I’m not saying it’s irrational to seek happiness, but the reasons for these choices are definitely on the emotional side.

Over-saving for retirement

We saved quite a bit more than we needed to retire to the life we want. We could have quit our jobs earlier, but nagging doubts about whether we had enough drove us to work longer. It’s quite reasonable to save some extra as a buffer, particularly if you have a high-paying job and you’d make much less trying to re-enter the workforce years later. However, we went well beyond a reasonable safety buffer.

But if we hadn’t over-saved, we would have felt uncomfortable, and we likely would have reduced spending on pleasures like travel. So, given our conservative financial natures, I think we made the right choice, even if it is somewhat emotional.

Large savings account

In an attempt to balance our individual net worths, we’ve saved my wife’s income and spent from mine. A side effect of this choice is that money needs to flow from accounts I control to accounts my wife controls. When she has to ask me for money, it makes her feel a little like she’s begging and has to justify her spending.

As far as we’re both concerned, all the money we have belongs to both of us, but this feeling of being less adult remains if she has to ask me for money. So, we opened an EQ savings account that pays good interest and filled it with enough cash that she won’t have to ask for money for more than a year. We consider this cash to be part of the fixed-income part of our portfolio.

We’d probably make a little more interest if we moved some of this cash to GICs, but the trade-off is worth it to us.

Real-time safe spending level

I created a spreadsheet that calculates our safe monthly spending level using near real-time market data. It’s good to know how much you can safely spend from your portfolio, but seeing the amount change in near real-time is clearly overkill.

However, when markets start dropping enough that it becomes a subject of conversation with friends and on social media, we tend to start having those nagging doubts about whether we’re spending too much. Being able to look at the spreadsheet and see a monthly spending figure that’s still clearly above what we spend gives us peace of mind. I think we’d likely curtail spending if we didn’t have the spreadsheet.

Whether we call these choices emotional or irrational, we’ve found they make our lives better. To those with different money personalities, these choices might seem strange, but I suspect we all make some financial choices to compensate for our emotional sides.

Monday, February 4, 2019

CPP and OAS Breakeven Ages

The default age to start collecting CPP and OAS is 65, but Canadians are allowed to defer these pensions until they’re 70 in return for permanently higher payments. The internet is filled with analyses of how old you have to live to come out ahead by delaying benefits. The mistake people make is in how they use these “breakeven” ages.

Suppose you work out that your CPP breakeven age is 85. If you don’t live that long, you’ll get more if you take CPP early, and if you live longer, you’ll get more by delaying CPP to age 70. There are many factors that feed into calculating a breakeven age, including how aggressively you invest, but let’s just use age 85 as an example.

Worrying about the breakeven age only makes sense if you have enough savings to live on until at least age 70 without one or both of CPP and OAS. If you don’t have enough savings, you have little choice but to start taking government pensions before your savings run out.

We’ll assume that you do have enough savings to live until at least age 70. It’s tempting to then guess whether you’re likely to live to your breakeven age (85 in this example) and let that guess drive your decision of when to start collecting CPP. But that’s not the right way to think about this important choice.

Suppose you work out that if you knew for certain you’d live to exactly 85, you can safely start spending $50,000 per year. At $50,000 per year plus cost-of-living adjustments each year, you expect to run out of savings at 85 whether you take CPP early or late (that’s what the breakeven age means).

Of course, there’s that nagging doubt: what if you live longer? Maybe you’re not likely to live longer, but do you really want to take a chance on having no savings left at age 85? So, you decide to spend a little less than $50,000 per year.

So, now you’re savings are likely to last past age 85. But how much longer depends on when you take CPP. Delaying to age 70 makes your savings last longer than if you take CPP at 60 or 65. Suppose that by lowering your spending, your savings will last until you’re 90 if you take CPP at 60, but will last until you’re 95 if you take CPP at 70. It seems obvious now that taking CPP at age 70 is the better choice.

Looked at another way, if you decide you don’t want your money to run out until you’re 95, then delaying CPP to age 70 gives you a higher safe spending level. But this isn’t just more spending when you’re old; you get to spend more right from the beginning of your retirement. It may seem paradoxical, but choosing to delay government pensions to age 70 can make it possible to safely spend more in your 60s.

However, if your plan is to spend so much less than your safe spending level that your money will last indefinitely whether you take CPP early or late, then you’ll be leaving money to your heirs no matter how long you live. Whether you should take CPP and OAS early or late comes down to whether you want to maximize your estate for an early death or maximize it for a late death.

So, the right way to think about a CPP or OAS breakeven age is to first ask yourself if you’re willing to spend down all of your assets by your breakeven age. If not, then you’re safe spending level is highest if you delay taking CPP or OAS until you’re 70.

Friday, February 1, 2019

Short Takes: Credit Score Obsession, Joint Account Benefits, and more

Here are my posts for the past two weeks:

Happy Go Money

My Investment Return for 2018

Preet Banerjee features prominently in this week’s short takes and weekend reading:

Scott Terrio explains how trying to optimize your credit score can make your finances and your life worse. Credit scores measure your profitability to banks. You are the product, not the customer.

Joint bank accounts curb wasteful spending according to a study by the University of Notre Dame’s Mendoza College of Business. My wife and I aren’t spenders, and we’ve always found joint bank accounts about as appealing as sharing a toothbrush. But this study could partially explain why some couples are adamant that joint bank accounts are the way to go.

Preet Banerjee explains research results on what motivates us to save for retirement. It turns out many people are more interested in helping their families than helping themselves.

Preet Banerjee interviews Dr. Avni Shah who explains research into how we feel pain of payment and how it affects our willingness to spend and how much we enjoy our purchases.

Fintech is leaving too many people behind. If there were more competition in financial services, customers would be better served.

Retire Happy explains some common investment mistakes made by retirees. This is an excellent guest post by Jason Heath.

Big Cajun Man looks at how to reduce his portfolio concentration as he nears retirement.

Robb Engen at Boomer and Echo discusses whether clients will abandon robo-advisors in the next stock downturn and what the robo-advisors are doing to try to prevent loss of clients.

The Blunt Bean Counter explains how to use his estate organizer to make things easier on your heirs. I’m helping with an estate right now, and I have little confidence that we’ll be able to find all assets. It’s hard to find things if you don’t know they exist.

Blair Crawford reports a simple but effective gift card scam.

Thursday, January 24, 2019

My Investment Return for 2018

During 2018, my portfolio’s return was -4.9%, my first annual loss since 2011. So, naturally I’m firing my financial advisor and ...

Wait. I don’t have a financial advisor. And even if I did, it’s a myth that financial advisors can prevent losses. Nobody can predict short-term stock market movements. If you’re in the stock market, you’ll have losses sometimes.

I manage my own investments, and in the wake of the poor returns in 2018, I’ve sold all my stocks to cash to wait out the uncertainty ...

Wait. I didn’t do that. There is always uncertainty in markets, even if our faulty hindsight makes the past seem less risky. The fact that markets dropped in the last few months of 2018 tells us little about the near future because momentum effects are too weak.

In reality, I stuck to my chosen asset allocation which includes a mix of stock ETFs, and a mix of cash and GICs to cover 5 years of my family’s spending. I use threshold rebalancing calculated on a spreadsheet that emails me whenever I have to do any trading. The truth is that I wasn’t paying much attention to stock markets during 2018.

Each year I calculate a benchmark return to compare to my actual return. The fact that my portfolio now has a substantial cash and GIC allocation moderates both my actual and benchmark returns. For 2018 the benchmark return was -3.2%.

So, why did my portfolio do worse than the benchmark? My benchmark is based on time-weighted returns, which means it assumes no deposits or withdrawals. I calculate my actual returns with the internal rate of return (IRR) method. Shortly before the stock markets started dropping, I made a substantial deposit to my portfolio. The timing of this deposit was unlucky and not something I was able to control.

To put my 2018 loss into context, here is my cumulative real return since 1995 compared to my benchmark (“real” means after subtracting out inflation):

That little drop at the end was 2018. It’s been a bumpy ride, but I’ll take the stock market volatility to get it’s high expected returns. My compound average real returns have been 8.02%. However, I base my spending on future 4% real returns for stocks (before taxes and other costs) and 0% real returns for cash and GICs.

I should comment on my spectacularly lucky 1999. My portfolio nearly tripled when I took an insane risk that happened to pay off. I could just as easily have lost 80% that year. I’ll never knowingly do anything remotely that risky with my portfolio again.

Now that I’m retired and don’t have a regular paycheque to help keep me from worrying too much about stock market risk, I’ve got my 5 years of cash and GICs to keep me napping while stocks try to get my attention. I’d rather meet up with friends than spend any time agonizing over stock prices.