Friday, April 9, 2021

Short Takes: Investing Simply, Income Tax Issues, and more

A big oversight of mine is that I never subscribed to my own email feed.  Like someone who donates to a charity to feel good about themselves without ever checking if the charity is doing good work, I made my articles available for free by email without ever checking whether the service was working well.  Fortunately, my wife subscribed and told me that sometimes there’s a day delay before an email arrives.  I’ve been working on fixing this.  I’ve now subscribed myself and noticed that the font was kind of small.  So I made it a little bigger.  Hopefully, with some periodic monitoring, I can make the experience better for everyone.

Here are my posts for the past two weeks:

Buy Now Pay Later Apps

Safety-First Retirement Planning

A Life-Long Do-It-Yourself Investing Plan

The Value of Monte Carlo Retirement Analysis

The Dumb Things Smart People Do With Their Money

Here are some short takes and some weekend reading:

Robb Engen makes a strong case for DIY investors to use a single asset-allocation ETF over more complex mixes of ETFs like Justin Bender’s Plaid Portfolio, Ben Felix’s Five Factor Model Portfolio, or my mix of VCN, VTI, VBR, and VXUS.  He’s right that few investors will manage these more complex portfolios successfully.  Complexity builds quickly when you’re managing multiple ETFs over RRSPs, TFSAs, and taxable accounts.  For my portfolio, I estimate my MER and foreign withholding tax (FWT) savings compared to just using VEQT for stocks is currently 0.29% per year.  This isn’t trivial, but you don’t have to mess up the plan much to lose these savings and more.  If I had to manage my portfolio by hand instead of having it automated in an elaborate  spreadsheet, I would gladly trade 0.29% per year for the simplicity of VEQT.  I recommend VEQT to my sons and other family and friends who ask.

The Blunt Bean Counter
is out with his list of common tax issues for the 2020 taxation year.

My Own Advisor makes a weak case that active investors shouldn’t bother benchmarking their portfolios.  I made a decision a while back to read fewer articles related to stock picking, but I still read some.  The main reasons not to benchmark your portfolio are 1) to avoid getting the bad news that your stock picks are losing to the market, and 2) to avoid the work required to figure out your portfolio’s return and to pick a benchmark.  Properly done, benchmarking begins with choosing in advance a mix of passive investments that roughly matches the allocations of your active portfolio.  Then at the end of the year, you can compare your portfolio’s return to that of your benchmark to see over the years whether your active picks are any good.  Most active investors don’t even know their portfolio’s return, so they’d be glad to hear that they don’t need to benchmark.  The few who do calculate their annual returns often find that their skills don’t look very good over the long term compared to a reasonable benchmark, and these investors are even happier to hear that they don’t need to benchmark.  My Own Advisor points to problems with finding a benchmark that matches your goals.  This isn’t actually very hard, but it usually requires blending a few indexes.  The key is to pick this mix in advance so you’re not tempted to choose a mix after the fact that makes your active portfolio look better.  My Own Advisor points to benchmarking being a lagging indicator.  However, the goal isn’t to go back in time and change your investments; it’s to find out whether you should keep picking your own stocks or abandon a losing effort.  It may be disappointing to find your efforts over a decade have lost you money, but it’s better to know the truth.  My Own Advisor suggests focusing on your life, health, and other more important things than benchmarking.  This advice applies much better to reclaiming the time you put into stock picking and just living your life while passive investments do their thing.  People are free to do as they wish with their money, including picking their own stocks and not checking their performance, but it’s not good to advise others to follow this path.

Thursday, April 8, 2021

The Dumb Things Smart People Do With Their Money

Even smart people do some dumb things with their money, according to Jill Schlesinger, a Certified Financial Planner and media personality.  In her book, The Dumb Things Smart People Do With Their Money, she goes over thirteen common costly mistakes.  It’s an easy read that might change your mind about a few things.  The focus is on the U.S., and some detailed parts aren’t relevant to Canadians, but the broad themes are still relevant.

The parts of the book I liked best dealt with buying financial products you don’t understand, buying a house in situations that clearly call for renting, taking on too much risk, indulging yourself too much during your early retirement years, not having a will, and trying to time the market.

On the subject of buying investments we don’t understand, the author says “There just isn't any need to invest in gold,” and “It’s usually a crappy investment.”  On reverse mortgages, some predatory lenders “go to extraordinary (and sometimes illegal) lengths to foreclose on borrowers’ homes,” and “many people take out reverse mortgages without analyzing whether they really should stay in their homes.”

Schlesinger believes strongly in getting advice from fiduciaries.  It’s a mistake to take “financial advice from someone who is trying, first and foremost, to sell you something that will make him or her money, rather than help you.”

In an interesting twist, the author says you don’t need professional advice or a customized plan if “you have consumer debt,” “you aren’t maxing out your retirement contributions (presuming that you are in a high enough tax bracket for that to make sense),” or “you don’t have an emergency account with enough money in it to cover six to twelve months of expenses.”

The section on taking too much risk has an excellent discussion of recency bias.  I see this in myself every time I add new money to my portfolio, take money out, or have to rebalance.  These actions always call for either buying something that has performed poorly recently or selling something that has performed well recently.  I’ve learned to overcome my recency bias in these contexts, but the feeling of wanting to stick with an asset class that has been rising never goes away.  You need “to minimize how many direct investment decisions you make.  The fewer decisions, the less opportunity for your internal biases to wreak havoc.”

Schlesinger devotes an entire chapter to indulging yourself too much early in retirement.  This flies in the face of claims that overspending early in retirement doesn’t meaningfully contribute to the fact that the average retiree spends less with age.

In one section the author links the decision to delay taking Social Security with staying on the job longer.  Maybe that makes sense under U.S. rules, but in Canada, one can certainly benefit by spending savings while delaying CPP and OAS until years after retiring.

The author believes that the amount people can safely draw in retirement is “3 percent or so.”    This makes sense as a starting withdrawal percentage for someone age 60 or younger who pays investment fees above 1% per year.  Higher safe withdrawal amounts are for disciplined low-cost DIY investors or older retirees.

“The insurance industry wants you to think that you need permanent insurance, but most people don’t.”  Well said.

The section on not trying to time the market contains many excellent points.  Unfortunately, at one point the author quotes some DALBAR figures that supposedly illustrate investors’ poor market timing.  The DALBAR methodology for calculating investor returns makes no sense.  It’s true that individual investors aren’t good market timers, but DALBAR penalizes investors who buy into the market with new savings because they didn’t invest the money sooner (i.e., before they even had it).

Overall, this book is an easy read and makes many good points.  One of the downsides of being smart is that you can delude yourself at the same time you persuade others.  This can lead to excessive risk-taking and costly mistakes.

Tuesday, April 6, 2021

The Value of Monte Carlo Retirement Analysis

You may have heard of using Monte Carlo simulators to test your retirement plan.  It sounds impressively scientific to hear that your retirement plan has a 95% chance of success.  However, these simulators necessarily make assumptions about future returns, and the simulator outputs are very sensitive to these assumptions.

The term “Monte Carlo” refers to any algorithm that uses random samples to solve some problem.  Such methods are used widely in engineering, science, finance, and other areas.  In finance, Monte Carlo simulators are used to create many random sets of possible future investment returns, and we can test a retirement plan against these possible futures.  In particular, we can define success in some way, such as not running out of money or not having to cut back too far on spending, and see how often a retirement plan succeeds.

Monte Carlo simulators can work in many different ways.  They can just assume some expected return and volatility for stocks and bonds and generate random returns from what is called a “lognormal distribution.”  Alternatively, they could just start with a collection of past monthly or annual returns and select randomly from this collection.  Some simulators leave out the Monte Carlo part and just use actual return histories starting from various dates.

Unfortunately, the outputs of these simulators are very sensitive to the assumptions built into them.  If you use lognormal returns, you get to choose the expected returns and volatilities of stocks and bonds.  These are just 4 numbers, but they can make the difference between a retirement plan failing 5% of the time or 50% of the time.  

For simulators that use a collection of past returns, we can get very different outcomes depending on what range of historical returns we use.  For example, bond returns from the past 40 years can’t possibly be repeated in the coming 40 years unless interest rates can drop somehow to negative double-digit levels.  A Monte Carlo simulator can easily hide an assumption that we’re headed to interest rates of minus 10%.  Most experts don’t believe future stock returns can match average 20th century returns in the U.S., but a simulator can assume they will.

Another problem most Monte Carlo simulators have is that they assume future returns aren’t correlated to past returns.  We know that when the stock market is high, expected future returns are low and vice-versa.  In a past article I illustrated this effect in pictures.

Yet another problem is that most simulators assume inflation is some low fixed value.  This problem shows itself most with annuities and bonds.  Inflation only has to bump up a little to cut deeply into the value of annuities and long-term bonds.  If a simulator doesn’t allow for the possibility that inflation could tick up a percentage point or two, how can we take its output seriously when it declares a retirement plan successful 95% of the time?

It’s certainly possible for a conscientious and talented financial advisor to take all these facts into account and choose sensible assumptions to build into a Monte Carlo simulator.  However, it’s tempting to tinker with assumptions so that clients can appear to be able to safely spend more during retirement.  Few advisors would admit to doing this, but because experts disagree over what simulator assumptions are sensible, it’s fairly easy to come up with a plausible justification for a wide range of assumptions to build into Monte Carlo simulators.

In the end, simulators can be less of a scientific tool and more of a marketing tool to impress clients and give them comforting answers.  This may sound damning, but comforting clients matters.  It’s not good to misuse a simulator to comfort a client about a bad retirement plan, but it is good to make a client feel safe committing to a good retirement plan.

Wednesday, March 31, 2021

A Life-Long Do-It-Yourself Investing Plan

The financial products available today can make do-it-yourself (DIY) investing very easy, as long as you don’t get distracted by bad ideas.  Here I map out one possible lifetime plan from early adulthood to retirement for a DIY investor that is easy to follow as long as you don’t get tempted by shiny ideas that add risk and complexity.

I don’t claim that this plan is the best possible or that it will work for everyone.  I do claim that the vast majority of people who follow different plans will get worse outcomes.

Most of my readers will be more interested in the later stages of this plan.  Please indulge me for a while; the beginning lays the foundation for the rest.

Starting out

Our hypothetical investor – let’s call her Jill – is at least 18, currently earns less than $50,000 per year, and has a chequing account at some big bank.  She has a modest amount of savings in her account earning no interest.  It’s about time she opened a savings account to earn some interest on her savings, but big bank savings accounts barely pay any interest.

So, Jill opens an online non-registered savings/chequing account at EQ Bank.  She chooses it because it’s CDIC-protected, transactions are free, and it currently pays 1.5% interest even though it lets you do the things a chequing account can do.  If EQ Bank ever changes its policy on offering competitive interest rates or free transactions, Jill will just switch to somewhere else that offers better terms.  It’s not worth switching for a small interest rate increase or for a limited-time offer, but if she can ever get say 0.5% more elsewhere, she’ll go.  (I mention EQ Bank because it appears to be among the best available for savings/chequing accounts right now; I get no money or other consideration for mentioning them.)

For now, Jill probably needs to keep her chequing account at the big bank.  The EQ account has to be linked to some other bank account, and you can’t access a bank machine through the EQ account.  It’s also good to be able to talk to a big-bank teller the rare time you need a certified cheque, to make a wire transfer, or to pay some bill you can’t figure out how to pay online.

Jill also opens a TFSA at EQ Bank.  It pays even higher interest, and she might as well earn the interest tax-free.  Sometime much later, Jill may want all of her TFSA room devoted to non-cash investments, at which time she can close this TFSA.  But for now her TFSA will hold some cash.

At this point Jill is learning about how TFSA contribution room works.  She’ll find that it’s best not to deposit and withdraw too often because you don’t get TFSA room back until the start of the next calendar year.  She should use her regular non-registered EQ account for more frequent transactions.

This plan will work well for Jill as long as she has fairly short-term plans for her savings, such as going to school.  As long as she will likely need her savings within 5 years, there’s nothing wrong with keeping it in cash earning as much interest as she can get safely and conveniently.

Let’s look at some potential distractions Jill faces on her current plan.

The bank teller says Jill should open a savings account and get a credit card.

Jill needs a good savings account, such as what EQ Bank offers, not a big-bank savings account that pays next to no interest.  If Jill gets a credit card, she should look for one that suits her needs, not take the conflicted advice of a teller.

All the cool kids are buying Bitcoin.

Jill is level-headed enough to know that she knows next to nothing about investing, never mind wild speculation in Bitcoin, or whatever is currently holding people’s interest.

Savings Start to Grow

At some point, Jill’s savings will grow beyond what she thinks she will need within 5 years.  Perhaps she has graduated, is working full time, and has no immediate plans to use all her savings as a down payment on a house.  She doesn’t carry credit card debt, has paid off her student loans, and has no other debts.  We’ll assume for now that Jill has no group RRSP at work and is making less than $50,000 per year, so that she’s not in a high tax bracket and has no reason to open a self-directed RRSP.  

Jill will still hold some cash savings she might need in the next 5 years in her EQ accounts.  Now it’s time to start investing in stocks with her longer-term savings.  Jill knows that stocks offer the potential for great long-term returns, but she has no idea which ones to buy.  Fortunately, she’s heard that even the most talented stock-pickers often get it wrong, so she’s best off just owning all stocks.  This may sound impossible, but the exchange-traded fund (ETF) called VEQT holds just about every stock in the world.  She can own her slice of the world’s businesses just by buying VEQT.  There are a few other ETFs with similar holdings, and it doesn’t matter much which one Jill picks.  (Once again, I mention VEQT because it appears to be among the best available stock index ETFs right now; I get no money or other consideration for mentioning it.)

Jill opens a TFSA at a discount brokerage.  It’s okay for her to have both this TFSA and the one at EQ Bank, as long as her combined contributions don’t exceed the government’s limits.  Any savings she adds to this new TFSA she uses to buy VEQT.  That’s it.  Nothing fancier.

The biggest lesson Jill needs to learn while her stock holdings are small is to ignore VEQT’s changing price.  Many people hope that their stocks won’t crash.  This is the wrong mindset.  Stocks are certain to crash, but we don’t know when.  We need to invest in such a way that we can live with a crash whenever it happens.  

Jill should just add new money to her VEQT holdings on a regular basis through any kind of market, including a bear market.  Trying to predict when markets will crash is futile.  She needs to accept that she can’t avoid stock crashes and that prices will eventually rise again.  This lesson is so important that Jill needs a different plan if she will panic and sell the first time VEQT drops 20% or more.  Learning that stock crashes are inevitable and calmly doing nothing different through them is critical for Jill's investment future.  Fortunately, in the coming years, Jill will focus on the safe cash cushion in her savings accounts when VEQT’s price drops.

What distractions could throw Jill off her plan now?

The bank says they can help Jill open a TFSA and invest her money.

The bank is just going to steer Jill into expensive mutual funds that will likely cost her at least 2% per year, which builds up to a whopping 39% over 25 years.  As incredible as it sounds, 39% of her savings and returns would slowly become bank revenue during those years.  It’s no wonder that bank profits are so high.  In contrast, VEQT’s fees are just 0.25% per year, which builds up to just 6% over 25 years.

The smart, sophisticated twenty-somethings are getting rich day-trading on Robinhood.

No, they’re not.  We only hear the stories about rare big temporary successes, not the widespread mundane losses.  Very few traders will outperform VEQT.  Over the long term, Jill will be ahead of more than 90% of investors and an even higher percentage of day traders.

Investing has to be harder than just buying one ETF.

In most endeavours, working harder gives better results.  With investing, you need to learn enough to understand the power of diversified, buy-and-hold, low-cost investing.  Beyond that, taking courses in stock picking will just tempt you to lose money picking your own stocks.

VEQT’s price is dropping! What should I do?

Inevitably, stock markets crash.  It’s hard to know how you’ll react until you experience a crash.  If Jill decides she really can’t handle a sudden VEQT price drop, her best course of action is to gut out this market cycle until VEQT prices come back up, and then choose a different asset allocation ETF that includes some bonds to smooth out the ride.  She can then stick with this new ETF into the future.

Rising income

Jill’s income is now enough above $50,000 per year that it makes sense to open an RRSP account at her discount broker.  She also has a group RRSP at work, and she contributes the minimum amount required to get the maximum match from her employer.  She would have participated in this group RRSP even if her income was lower because the employer match is valuable.

Jill figures out how much she’d like to contribute each year to her RRSP at the discount brokerage.  This has to take into account her RRSP contribution limit, her group RRSP contribution as well as the employer match, and the fact that there is little to gain from reducing her taxable income below about $50,000.  If she wants to add even more to her long-term savings than these RRSP contributions, she can save some money in her discount brokerage TFSA.

Next comes the decision about what to own in her self-directed RRSP.  Once again, she buys only VEQT.  Nothing fancier is needed, and most people won’t do as well as just owning VEQT.

When Jill looked into the details of her group RRSP, she was disappointed that the fees were so high; VEQT isn’t one of the investment options.  But she can’t get the employer match without choosing among the expensive funds.  So, her plan is to learn the vesting rules of her group RRSP, and once she’s allowed to transfer assets to her self-directed RRSP without penalties or losing the company match, she’ll make this transfer every year or two.  She’ll be careful to make these direct transfers from one RRSP to another rather than withdrawals.  However, when asking questions about the group RRSP rules, she’ll be careful not to reveal her plans to avoid the expensive fund choices.  The company operating the group RRSP may become less than cooperative if they know Jill has no intention of paying their excessive fees on a large amount of savings.

So, Jill now has VEQT holdings building in her RRSP and TFSA at the discount brokerage.  Her investment plan remains wonderfully simple.  But there are distractions ready to push her off this plan for easy success.

All the savvy thirty-somethings are talking about dividend stocks.

Most dividend investors are poorly diversified, but it’s possible to own enough dividend stocks to be properly diversified.  Does Jill really want to spend her time poring over company financial statements to choose a large number of dividend stocks?  Some people like that sort of thing.  Jill doesn’t.  She’s better off with VEQT.

Now that Jill’s savings are growing, surely she’s ready for a more sophisticated investment strategy.

Just about everyone who tries more complicated strategies won’t do as well as just owning VEQT.  Jill is best off just sticking with her simple plan.  She’s not keeping it simple because she’s not capable of handling something more complex.  It’s just that there’s no guarantee that a more complex strategy will perform better, and she’s not interested in doing the necessary work.  Jill used to be annoyed at people with more complex strategies because it made her feel dumb to have such a simple plan.  But now she just wishes these people well; she knows she has a smart strategy no matter what it sounds like to others.

Buying a home

Jill decides to buy a home in the next couple of years.  The cash she has in her EQ accounts isn’t enough for a down payment; she plans to use all of her investments in her discount brokerage TFSA as well as $35,000 of her RRSP investments through the home buyer’s plan.

Suddenly, money that she didn’t plan to use for at least 5 years has become money she wants to use sooner.  So, she sells the VEQT in her TFSA, and sells $35,000 of the VEQT in her RRSP.  This protects her home-buying plans in case VEQT’s price suddenly falls between now and when she buys her new home.

Jill still wants to earn good interest on her cash, so she checks out the options for cash interest at her discount brokerage.  Unfortunately, the interest rates are not nearly as good as what EQ Bank offers.  So, she opens an RRSP at EQ Bank, and arranges for TFSA-to-TFSA and RRSP-to-RRSP transfers from her discount brokerage to her EQ bank accounts.  She’s careful to make sure she isn’t making withdrawals, but direct transfers.

From now until she buys the home, she directs all new TFSA savings to cash in her EQ Bank TFSA to build her down payment. But she won’t use all her cash on hand as a down payment, because there will inevitably be expenses with a new home.

After buying the home, she plans to direct new savings to paying down the mortgage.  She’ll still participate in her group RRSP, but she won’t contribute to her TFSA or self-directed RRSP for a while.  She wants to get the mortgage down to a less scary level in case mortgage interest rates rise.  Once the mortgage is somewhat tamed, she’ll resume adding to her TFSA and self-directed RRSP, and she’ll invest in VEQT.

New distractions as well as the old ones are ready to push Jill away from her simple plan.

Isn’t it better to invest than pay off the mortgage while rates are so low?

This is good reasoning to a point.  It comes down to how stretched you are.  A quick test is to calculate what your mortgage payment would be if interest rates rise 5 percentage points.  If this payment would cause you serious problems, you’re probably best to pay extra on the mortgage for a while.  With her life ticking along so well, Jill sees no need to add risk.  Once the mortgage principal is down to a more comfortable level, she’ll resume adding to her investments.

Surely it’s finally time for a more sophisticated investment strategy.

Jill’s simple investment strategy is working well, and she’s busy with her new home, her job, and the rest of her life.  There’s no reason to believe a different strategy will work better for Jill.  As we’ll see later, there are ways for Jill to cut her investment costs, but her portfolio still isn’t large enough for the reduced costs to give significant savings, and she’s definitely not interested in doing the extra work necessary to get these savings.

Approaching retirement

Thoughts of retirement are entering Jill’s mind, but she’s not ready to stop working yet.  She’s amazed at how seemingly modest monthly savings have turned into large balances in her investment accounts.  She’s married now, and together with her husband they have 8 investment accounts including non-registered (taxable) accounts, TFSAs, RRSPs, a spousal RRSP, and a LIRA.  Across all these accounts, all they invest in is VEQT.  It couldn’t be simpler for DIY investors.

Jill still has a regular non-registered high-interest savings account (HISA); her only TFSA now (at the discount brokerage) holds only VEQT.  The HISA still holds cash she thinks she might need in less than 5 years.  This includes emergency savings and cash for anything expensive she anticipates buying.  Over the years she considered investing some of this cash in GICs, bonds, and other possibilities, but the interest rate on her account remained competitive with these other options, and having the cash ready at a moment’s notice is comforting.

Jill is starting to think about building her fixed-income investments anticipating retiring in less than 5 years.  This fixed-income allocation will include her HISA and some short-term bonds; she’s not interested in taking on the inflation risk and interest-rate risk of long-term bonds.  She chose the ETF called VSB for her bonds.  She plans to build her fixed income holdings slowly until it’s 5 times her annual spending by the time she retires.  All her stock holdings will remain in VEQT.

The family’s stock portfolio is now roughly a million dollars.  Even VEQT’s low 0.25% management expense ratio (MER) costs Jill $2500 per year.  She pays another cost as well: foreign withholding taxes (FWT) on the dividends of non-Canadian stocks.  This impact of this tax burden varies between registered and non-registered accounts and totals $2000 per year for Jill.

It’s possible to reduce Jill’s MER and FWT costs.  For example, there are U.S.-based ETFs that have lower MERs, and when they’re held in RRSPs/RRIFs, the U.S. doesn’t withhold dividend taxes.  Justin Bender has a portfolio he calls Plaid that cuts costs compared to VEQT.  My personal portfolio cuts MER and FWT costs by 0.29% per year compared to VEQT.  Benjamin Felix takes a different path to higher promised returns with his Five Factor Model Portfolio that seeks to give investors higher returns through exposure to known investment factors.  What all three portfolios have in common is their increased complexity compared to Jill’s plan.

So why shouldn’t Jill try to cut costs or get higher returns?  $4500 per year isn’t cheap.  Robb Engen made a compelling case for sticking with a simpler portfolio based on a single asset-allocation ETF, such as VEQT.  I’ll save further comment for the first distraction Jill faces below.

C’mon, don’t be a chump.  It can’t be that hard to run a portfolio that saves costs or boosts returns.

Running a portfolio with multiple ETFs and many accounts is a lot more work than it appears to be.  The complexity apparent in theory grows tenfold in practice.  Every decision we have to make is another opportunity for the recency bias baked into our brains to cause us to buy high or sell low.  Unless Jill would enjoy building a spreadsheet to automate a complex portfolio, it just isn’t worth her time and effort to try to save some of the $4500 she pays per year.  Many people who try to run a more complex portfolio will end up making costly mistakes that outstrip the savings they’re trying to achieve.  I run a somewhat complex portfolio with my big spreadsheet and scripts to send email alerts, but I tell my sons to just buy VEQT.

Why not pick your own stocks and do away with MER costs altogether?

For all but the best stock-picking professionals in the world, people are essentially picking stocks randomly.  Devoting countless hours to researching stocks ends up being no better than throwing darts.  To be adequately diversified, you must own many stocks.  The risks of owning too few stocks can be more costly than the small MER on VEQT.  Jill isn’t interested in devoting her life to researching stocks for what could turn out to be worse results than owning VEQT.

What about gold as an inflation hedge, or real estate for more diversification?

Unlike businesses, gold produces no earnings.  In fact, it costs money to guard gold.  Over the long term, gold returns have been dismal compared to stocks.  The array of businesses held by VEQT have vast real estate holdings.  Jill doesn’t need to buy more real estate.  There will always be investments that come with some sort of story, but Jill doesn’t need them.  She doesn’t need hedge funds, commodities, or IPOs either.


Jill’s thoughts have turned to how best to spend from her retirement savings.  She is maintaining her fixed income allocation in a HISA and the ETF VSB for a total of 5 years’ worth of her family’s spending.  The rest of her portfolio in all discount brokerage accounts is still in VEQT.  She spends from her HISA, and each year she sells some VEQT to replenish her fixed income allocation.

She has decided what percentage of her portfolio she can safely spend each year.  This percentage rises with her age, similar to mandatory RRIF withdrawal percentages.  In the years before she starts collecting CPP and OAS, she actually spends more so that she can live as well now as she’ll live after getting these government pensions.

Jill considered buying an annuity for more income certainty, but the lack of inflation protection in available annuities put her off.  She might consider buying an annuity later in her retirement when inflation will have fewer years to erode fixed payments.

Jill has been following her plan successfully for some time now, but she still faces distractions.

Stocks are sure to crash soon.  Jill has to protect her portfolio now that she’s no longer earning an income.

People are always making scary predictions.  The truth is that nobody knows when stocks will crash or when they’ll shoot up.  Jill has her fixed income allocation to buffer stock volatility.  If a stock market crash would devastate her finances, she probably should have begun retirement with a fixed-income allocation of more than 5 years of spending.  Selling stocks when she’s nervous and buying stocks when she’s comfortable is unlikely to work out well.

An insurance guy has this great variable annuity with guaranteed minimum lifetime withdrawals.  Your money gets invested inside the annuity and if it performs well you get higher payments.  But you always have your guaranteed minimum payments.

Insurance companies invent lots of products that make it seem like you can have your cake and eat it too.  Somehow, rising markets will make you rich, and with falling markets you get your guaranteed income.  To complete the magic, the insurance guy gets a fat commission for selling the variable annuity, and the insurance company makes money too.  All the children in Lake Wobegon are above average.  

Reality isn’t so wonderful.  Commonly, the fees applied to your investments within the variable annuity are very high, which significantly reduces the odds that they’ll perform well enough to give you higher payments.  Further, the guaranteed income typically isn’t indexed to inflation.  Decades of inflation crush the buying power of fixed payments.  It isn’t impossible for a variable annuity to be a good deal; I’ve just never seen one.

This pre-construction condo project pays 12% interest on a second mortgage.  That’s way better than the pitiful 1.5% interest on a HISA.

This is another example of an investment few people really understand.  If the borrower was likely to make the payments, someone who understands this business well would already have invested.  Whoever is selling this to Jill is hoping for a fat commission.  It’s dangerous to chase higher yield on money that’s supposed to be safe.


Jill’s plan was simple and she followed it successfully.  Her most difficult challenges were avoiding distractions and sticking with her plan.  There are many other plans that can work out well too, but constantly switching to shiny new plans won’t work out well.  More complex plans can seem sophisticated, but most people who follow such paths will get worse results than Jill got.

Tuesday, March 30, 2021

Safety-First Retirement Planning

An alternative to managing a portfolio of stocks and bonds through retirement is to use insurance company products such as annuities and whole life insurance to get more predictable outcomes.  Mixed approaches are possible as well.  Wade Pfau, a professor of retirement income, makes the case for income guarantees in his book Safety-First Retirement Planning.  The book is a dry read, but it’s thorough in its explanation of insurance company products.  Pfau’s intent is to persuade the reader that annuities and whole life insurance can help build a better retirement, but the book had the opposite effect on me.

Any reader looking for a deep understanding of income annuities, variable annuities, fixed-index annuities, and whole life insurance along with the vast array of bells and whistles available on these products will find it in this book.  Income annuities are simple enough, but the other insurance products have so many small variants that it seems impossible to compare the products of different insurance companies without a retirement researcher at your side.  “Prospectuses about variable annuities can be hundreds of pages long.”

With so much variation in available products, you may wonder how the author is able to make any general claims about how to use these products well.  The answer is that he made many simplifying assumptions.  The biggest assumption is that the insurance products are “competitively priced.”  This assumption is so at odds with some practices in the real world that the chapters on variable annuities and fixed index annuities begin with disclaimers.

Pfau limits his discussion to “good” variable annuities whose “fees are not excessive” and whose complexity is not used to “hide a lack of competitiveness in the pricing.”  He limits his discussion of fixed-index annuities similarly and further assumes they are “not being sold by an unscrupulous financial advisor only to generate a commission.”

My personal experience with variable annuities and fixed index annuities is limited, but I have waded through the rules for a few of them.  In every case, it was clear to me that the products were not “good.”  They were overpriced and their income guarantees were highly vulnerable to inflation, even if inflation stays at low levels.  I’m not optimistic about finding a “good” variable annuity or fixed index annuity of the theoretical types described in this book.

The only insurance product I’ve ever seriously considered is an income annuity indexed to the Consumer Price Index (CPI), but these seem not to be available in Canada.  I might consider an income annuity without inflation protection late in life when I’m less concerned about inflation uncertainty over decades.  The author hasn’t given me a reason to change my mind on these points.  But this isn’t so much a problem with the book as it is a sign that Pfau’s presentation is thorough and unbiased.

One of the side effects of considering theoretical versions of insurance products showed itself in one example comparing a simple income annuity to managing a portfolio of stocks and bonds.  The conclusion was that the annuity allowed higher retirement spending, but this conclusion depends on being able to buy an annuity for the price Pfau calculates.  I don’t know if that is possible in the real world.

For anyone considering whole life insurance, Pfau makes it clear that you should think of it as a replacement for the bonds in your portfolio.  Further, the main value of whole life insurance is the tax deferral, so it makes most sense for someone who has already maxed out tax-advantaged retirement accounts, but still wants more fixed-income investments.

My expectation before reading this book was that it would cover how to decide on portfolio allocation to stocks, bonds, and annuities based on annuity prices and stock and bond future return expectations.  However, the final chapters on pulling everything together didn’t really cover this.  Any rational means of deciding how much to spend on an annuity would be sensitive to the annuity’s price.

Pfau admits that his “discussion has been based on a simplified model in which future inflation is fixed and known.  There was no possibility for unexpectedly high inflation.”  This is why his analyses don’t call for using annuities whose income guarantees are CPI-adjusted.  But in the real world, decades of inflation uncertainty make annuities with fixed income guarantees much riskier than they appear.

The author attempts to partially justify the lack of focus on inflation-protected income guarantees by observing that “inflation-adjusted spending for many retirees can be expected to decline with age.”  The implication of observing that the average retiree spends less with age is that we should plan our retirement assuming we’ll do the same.  This is like observing that the average adult carries a few thousand dollars in credit card debt, so we should all do the same.  Why should we emulate the behaviour of the average retiree when we know that some retirees overspend early and later have to cut spending?

Overall, this book gives a thorough, unbiased explanation of retirement insurance products.  I’m left with a much better understanding of annuities and life insurance.  In theory, retirees could benefit from certain types of fairly priced annuities and life insurance.  In practice, what I learned only solidified my reasons for avoiding most insurance company retirement products.

Monday, March 29, 2021

Buy Now Pay Later Apps

If your financial life is going well, you’ve probably never used a Buy Now Pay Later (BNPL) app and may not have ever heard of them.  Here I look at what return they make on their money, and who pays them this return.

For a good explanation of BNPL apps, see Preet Banerjee’s video where he covers what they are and why you should avoid them.  In a typical case, if you are online buying a $100 item, you might encounter an offer to pay $25 now, and then $25 more in 2, 4, and 6 weeks.  From your point of view, this looks like an interest-free loan, but the BNPL company might only pay the retailer $94.  So, the BNPL company makes $6 over 6 weeks.

BNPL Returns

For this example, Preet calculates the BNPL company’s return as $6 on $94 invested over 6 weeks (42 days).  This works out to an annual uncompounded rate of (6/94)*(365/42) = 55%.

However, the BNPL company didn’t wait 6 weeks for the whole $100.  In fact, it got $25 of this money right away.  So, we could say that their investment was only $69 for 6 weeks.  This works out to an annual uncompounded rate of (6/69)*(365/42) = 76%.

But this still doesn’t account for the fact that the BNPL company got $25 in 2 weeks and another $25 in 4 weeks.  If we calculate the internal rate of return on investing $69 to get back $25 in 2, 4, and 6 weeks, it works out to 4.29% every 2 weeks.  Compounding this annually gives a whopping 199%!  This assumes that all returns get reinvested.

But what if we want to calculate the uncompounded return where the BNPL company makes a single investment and never reinvests returns?  The easiest way to think of this is to imagine the BNPL company entering into a series of $100 purchases where they invest $69 on each purchase to get back $25 in 2, 4, and 6 weeks. We will treat $2 from each payment as profit, and the remaining $23 as a return of the BNPL company’s working capital.

Suppose the BNPL company starts with $138 to invest.  They immediately invest $69 in one online purchase, leaving $69 of their capital uninvested.  Two weeks later, they get back $23 of their capital (and a $2 return), and they invest another $69 in a purchase, leaving them $23 of capital.  Two more weeks later, they get back $46 of their capital (and a $4 return), and they invest another $69 in another purchase (with no leftover capital).

From here on, every two weeks the BNPL company gets back $69 of their capital to invest in another purchase, and they get a $6 return.  They can continue this indefinitely having 3 purchases on the go at all times, all with just the initial $138 of working capital.  If we constrain the BNPL company to winding up all transactions by the end of the year, their total return on $138 is 26 payments of $2, $4, $6, $6, $6, …, $6, $6, $6, $4, $2.  This is a total return of $144, and an annual uncompounded return of 144/138 = 104%.

If we just focus on the steady-state condition where the BNPL company makes $6 every 2 weeks on a $138 investment, the uncompounded return is (6/138)*(365/14) = 113%.

So, which return value is correct?  I’d say the uncompounded return is 113%, and the compounded return is 199%.  Either way, this is well over the usury level of 60%.  However, it’s not at all clear who, if anyone, is being charged this interest.  The deal looks interest free to the consumer, and it looks like a 6% fee to the retailer.

Who Pays for BNPL Returns?

If we look at the retailer and customer as a single entity, they accept $94 from the BNPL company and return $100 spread over 6 weeks.  So the retailer and customer as a combined borrower are paying usurious interest rates in this example.  But it’s not easy to define how they are treated as individuals.

Ultimately, the high cost of the BNPL “service” has to be paid by some combination of consumers and retailers.  Who pays depends on how much the retailer is able to increase prices to cover this cost.  Sadly, it’s not just the consumers who use BNPL apps who pay this price.  When retailers raise prices, everyone pays more no matter how they pay.

Friday, March 26, 2021

Short Takes: CRA Accounts, Asset-Allocation ETFs, and more

I enjoyed Nassim Taleb’s take on Bitcoin (below).  He doesn’t hold back.  There’s a huge difference between pricing Tesla cars in Bitcoin vs. asking for the Bitcoin equivalent of the car’s price in U.S. dollars.  He also says those who believe Bitcoin is a store of value are “ignorant.”  In a different tweet, he says that if you return your car, Tesla has the option to refund you the Bitcoin you paid or the dollar equivalent Bitcoin amount (whichever is less, presumably).  This doesn’t sound like much of a commitment to Bitcoin by Tesla.

Here are my posts for the past two weeks:

Pre-Construction Deals Create a Dishonesty Option

How to Account for High Stock Prices in Retirement Spending

TurboTax Gets Medical Expense Optimization Wrong

Mutual Fund Deferred Sales Charges are Designed to Hide Bad News

How Much Savings Do You Need to Delay Starting CPP and OAS Pensions?

Here are some short takes and some weekend reading:

Rishi Maharaj has a sensible take on the security problems with online CRA accounts that have left nearly a million Canadians locked out.  “The CRA should be commended for surveilling which usernames and passwords are being sold by fraudsters and proactively freezing those accounts. But that’s where the plaudits end.”

Boomer and Echo answers reader questions about asset allocation ETFs and their fees.

Ben Felix explains the elements of good financial advice on the latest Rational Reminder podcast.  Spoiler: it’s not picking stocks or investment managers.  As usual, his ideas are well thought out, but the hard part is quantifying the value of the advice, which will be different for each investor.  Even if Ben’s advice is superior to your own choices in more ways than just portfolio size, the question is whether his advice is enough better to overcome its cost.

Wednesday, March 24, 2021

How Much Savings Do You Need to Delay Starting CPP and OAS Pensions?

Canadians who take their CPP at age 60 instead of 70 “can expect to lose over $100,000 of secure lifetime income, in today's dollars, over the course of their retirement,” according to Dr. Bonnie-Jeanne MacDonald in research released by the National Institute on Ageing (NIA) and the FP Canada Research Foundation.  However, those who retire before 70 need savings to tide them over until their larger CPP pensions start if they want to live at least as well in their 60s as they do later in retirement.  Here we look at the amount of savings required by a retired 60-year old to be able to delay CPP and OAS pensions.

We’re used to thinking of CPP and OAS pensions as just a few hundred dollars per month, but a 70-year old couple just starting to receive maximum CPP and OAS pensions (but not any of the new expanded CPP) would get $61,100 per year, rising with inflation for the rest of their lives.  If the same couple were 65 they’d only get $43,700 per year.  If this 65-year old couple had taken CPP at 60, their combined CPP and OAS would be $32,700 per year now.  The incentive for delaying the start of CPP and OAS is strong.

We can think of the savings needed to delay the start of CPP and OAS pensions as the price of buying larger inflation-indexed government pensions.  This price is an absolute bargain compared to the cost of buying an annuity from an insurance company.  Those in good health but worried about “losing” if they delay pensions and die young can focus on the positives.  Delaying pensions allows retirees to spend their savings confidently during their 60s knowing that their old age is secure.  Taking small pensions early can leave retirees penny-pinching in their 60s worried about their savings running out in old age.

The table below shows the amount of savings a retired 60-year old requires to delay starting CPP.  This table is based on a number of assumptions:

  1. The current maximum age 65 CPP pension is $1203.75 per month.  Before you take your CPP pension, it grows based on national wage growth as well as an actuarial formula, but after you take it, it grows with “regular” inflation, the Consumer Price Index (CPI).  We assume wage growth will exceed CPI growth by 0.75% per year.
  2. We assume the retiree is entitled to the maximum CPP pension.  Those with smaller CPP entitlements can scale down the savings amounts.  For example, someone expecting only 50% of the maximum CPP pension can cut the savings amounts in half.
  3. We assume the retiree holds savings in an RRSP/RRIF so that withdrawals will be taxed in the same way that CPP pensions are taxed.  Retirees using savings in non-registered accounts won’t need to save as much because they only need to match the after-tax amount of CPP pensions.
  4. The retiree is able to earn enough on savings to keep up with inflation.  (Online banks offer savings account rates that put the big banks to shame.)  The monthly pension amounts in the table are inflation-adjusted; the retiree’s savings will grow to cover the actual CPP pension payments.
  5. We assume the retiree doesn’t have a workplace pension whose bridge benefits end at age 65.  This bridge benefit replaces some of the savings needed to permit delaying CPP and OAS.
CPP % of  Inflation-Adjusted  Months of Savings
 Start   Age 65 CPP  Monthly CPP Spending from  Needed at 
Age Pension Pension  Personal Savings  Age 60
60 64.0% $770 0 0
61 71.2% $863 12 $10,400
62 78.4% $958 24 $23,000
63 85.6% $1054 36 $37,900
64 92.8% $1151 48 $55,200
65 100.0% $1250 60 $75,000
66 108.4% $1365 72 $98,300
67 116.8% $1481 84 $124,400
68 125.2% $1600 96 $153,600
69 133.6% $1720 108 $185,800
70 142.0% $1842 120 $221,000

Unlike CPP, you can’t start your OAS pension until you’re at least 65.  But you can delay it until you’re 70 to get larger payments.  The table below shows the amount of savings a retired 60-year old requires to delay starting OAS.  The table is based on a number of assumptions:

  1. The current maximum age 65 OAS pension is $615.37 per month.
  2. We assume the retiree is entitled to the maximum OAS pension by living in Canada for at least 40 out of 47 years from age 18 to 65.
  3. We assume the retiree won’t want to live poor before age 65, which means spending from savings from age 60 to 64 to make up for not receiving OAS.
  4. We assume the retiree holds savings in an RRSP/RRIF so that withdrawals will be taxed in the same way that OAS pensions are taxed.  Retirees using savings in non-registered accounts won’t need to save as much because they only need to match the after-tax amount of OAS pensions.
  5. The retiree is able to earn enough on savings to keep up with inflation.  The monthly pension amounts in the table are inflation-adjusted; the retiree’s savings will grow to cover the actual OAS pension size.
  6. We assume the retiree doesn’t have a complex tax reason (e.g., OAS clawback) that makes it better to take OAS early.

OAS % of  Inflation-Adjusted  Months of Savings
 Start  Age 65 Monthly OAS Spending from  Needed at 
Age  OAS Pension  Pension  Personal Savings  Age 60
65 100.0% $615 60 $36,900
66 107.2% $660 72 $47,500
67 114.4% $704 84 $59,100
68 121.6% $748 96 $71,800
69 128.8% $793 108 $85,600
70 136.0% $837 120 $100,400

An example of how to use these tables

The Harts are 60 years old and recently retired.  They have $400,000 combined in their RRSPs.  Their CPP contribution histories entitle them to a 70% CPP pension each, and they’re both entitled to a full OAS pension.  They’ve decided to hold back $100,000 of their savings as a reserve or emergency fund, but are willing to spend the remaining $300,000 during their 60s in exchange for much larger guaranteed, inflation-indexed CPP and OAS pensions for the rest of their lives.  They’re tempted to reserve even more of their savings, but this would mean lower guaranteed income.

The Harts don’t want to live poor now just so they can have more income later.  So, we first go to the age 65 row of the OAS table to see that they need to spend $36,900 each from 60-64 to make up for OAS not starting until 65.  This leaves $226,200 of their savings to “buy” more CPP.  We began with OAS because starting OAS at 60 isn’t permitted.  We then focus on CPP because delaying CPP boosts pensions more than delaying OAS.  Only if we can delay CPP to 70 do we go back to the OAS table to choose a later OAS start age.

Because their combined CPP entitlement is 140% of a single maximum CPP pension, we divide $226,200 by 1.4, to get $161,600, and look up this amount in the right column of the CPP table.  We find that the Harts can delay CPP until they’re about 68.  So, the plan is to spend one-eighth of the $226,200 each year for 8 years (so CPP can start at 68) plus an extra one-fifth of $73,800 each year for the first 5 years (because OAS will start at 65).

So the Harts now have a plan.  But their lives might not play out exactly as they expect.  As they approach 65, they will apply for OAS, but they might apply for CPP before or after age 68, depending on how much they spend in the coming years, their portfolio returns, and changes to their needs for a savings reserve or emergency fund.  They will be guided by watching their RRSP balance to make sure it doesn’t drop below a sensible reserve amount.

The maximum savings required by a 60-year old to delay pensions to age 70 is $221,000 for CPP and $100,400 for OAS, for a total of $321,400.  This doubles to $642,800 for couples. Those with at least this much saved are able to maximize guaranteed inflation-indexed government pensions that will last as long as they live.  Those whose CPP or OAS pensions are less than the maximum won’t need to have as much saved.  Those who retire before age 60 will need to use more savings to tide them over until CPP and OAS pensions begin.

Although Canadians have many reasons for taking their CPP and OAS pensions early, the only reasons that stand up well to scrutiny are very poor health and lack of savings.  Here we showed how much retirees must have saved to tide them over to the start of enlarged CPP and OAS pensions.

Monday, March 22, 2021

Mutual Fund Deferred Sales Charges are Designed to Hide Bad News

Mutual fund investors caught by deferred sales charges (DSCs) understand their downside.  They’d like to sell their funds but face penalties as high as 7% if they sell.  DSCs are set to be banned across Canada (but only restricted in Ontario) in mid-2022.  Until then, mutual fund salespeople masquerading as financial advisors can still sell funds with DSCs to unsuspecting investors.

Before DSCs existed, it was common for advisors who sold mutual funds to get a “front-end load,” which is a fancy term for giving some of an investor’s money to the advisor or the advisor’s employer.  So, an investor might invest $50,000 with an advisor, but the first account statement might show only $47,500.  The missing $2500 was a 5% front-end load offered as an incentive to the advisor to hunt for mutual fund buyers.

Not surprisingly, investors didn’t like to see a big chunk of their savings disappear like this.  Mutual funds had a problem.  They needed to give commissions to advisors so they would sell mutual funds, but investors didn’t like to see some of their money disappear.  The solution to this dilemma came in two steps.

Raising Annual Fees

Mutual funds charge annual fees to investors called the Management Expense Ratio (MER).  MERs are expressed as a percentage of invested assets, and while they seem small, they build up to intolerable levels over decades.  Many mutual fund investors don’t know about MERs and don’t notice their corrosive effects.

One way to cover the cost of advisor commissions is to simply raise a fund’s MER.  This works well when investors stay for the long term.  When investors stay longer than 5 years, a one percentage point  increase in the MER covers a 5% up-front advisor commission.

But what happens when an investor sells out of the fund after less than 5 years?  In this case, the mutual fund can’t recover the advisor commission.  Even, worse, advisors would have an incentive to move investor money frequently from fund to fund to collect more commissions, and investors wouldn’t mind because it wouldn’t cost them anything.

Deferred Sales Charges (DSCs)

Someone had the bright idea to charge investors penalties when they leave a fund too soon.  Today, it’s common for DSC funds to charge investors as much as a 7% penalty for withdrawing their money in the first year.  This penalty typically declines each year until it’s gone after investor money has been in a fund for 7 years.

So, investors end up paying advisor commissions one way or the other.  Either the investor stays in the fund for a long time paying high MERs, or the investor leaves early and pays the deferred sales charge.  Advisors still have an incentive to move investors’ money from fund to fund to generate more commissions (called “churning”), but many investors would notice the hefty DSC charges.

Mutual funds and advisors often tell potential investors that DSCs are an incentive for investors to focus on the long-term, but the truth is that DSCs are a way to pay advisors to sell mutual funds in a way that is invisible to most investors.  This magic trick of hiding hefty advisor commissions gets advisors through the early stages of the relationship with a new client.  Problems don’t appear until the client tries to leave.

It’s not a stretch to say that the introduction of DSCs led to the mutual fund explosion that started around 1990 in Canada.  Once mutual fund fees were pushed further from investors’ view, sales took off.


So, if an advisor is trying to sell you a DSC mutual fund, you’re being asked to accept high annual fees for as long as you own the fund, and if you try to sell early, you’ll get hit with additional fees.  It’s not hard to see why this might not be in your best interests.

Thursday, March 18, 2021

TurboTax Gets Medical Expense Optimization Wrong

One of my family members often helps her friends file their income taxes with TurboTax.  For a couple she helped (let’s call them the Greens), she entered their medical expenses the way she thought was best.  Then TurboTax offered to “optimize” the medical expenses.  So, she tried it.  The result was that the Greens owed almost $2000 more in taxes.  So much for optimization.

Optimizing medical expenses is surprisingly tricky.  You get to decide which partner in a couple makes the claim.  The Greens have unusually large medical claims this year.  When Mr. Green claims them, the total taxes owing for both of them is nearly $2000 less than when Mrs. Green claims them.  But TurboTax insists that Mrs. Green should claim them.  What went wrong?

The answer begins with how medical expenses affect your taxes.  First, your claim is reduced by 3% of your net income, but this reduction is capped at $2397 (in 2020) for higher earners.  So, if both Mr. and Mrs. Green had high incomes, it wouldn’t matter much who claims the medical expenses, because they would each get the same increase in non-refundable tax credits, and the tax reduction you get from non-refundable tax credits is a fixed percentage.

However, the $2397 cap on the medical expense reduction isn’t relevant to the Greens.  So, their reduction is 3% of the net income of whoever makes the medical claim.  So, it would seem that it’s better for the lower-income partner to make the claim.  This appears to be what TurboTax did because Mrs. Green’s net income is a few thousand less than Mr. Green’s.

The problem is that Mrs. Green wouldn’t owe much tax without the medical claim.  They’re called “non-refundable” tax credits because they can’t cause your total tax owing for the year to go below zero.  So, if Mrs. Green makes the medical claim, she gets more non-refundable tax credits than Mr. Green would get, but this doesn’t help because her taxes only go down very modestly.

It’s better for Mr. Green to make the medical claim in this case.  But the fun doesn’t end there.  It turns out that the medical claim is so large that much of it is wasted by having Mr. Green claim it all.  They could split the claim, but this leads to two separate 3% of net income deductions, and it wouldn’t help Mrs. Green much anyway because she is already paying very little tax.

It turns out the best answer is to have Mr. Green claim just enough of the medical expenses to reduce his taxes owing to zero.  Then they can use the rest of the medical claims next year.  The rule is that you can claim medical expenses for any 12-month period that ends in 2020.  So, Mr. Green should choose an end date that includes just the right amount of medical expenses to eliminate any tax he owes for this year.  Then the Greens can use the remaining medical expenses next year.

All of this is very specific to the Greens’ particular situation.  The important thing is to understand how the rules work to be able to optimize other situations.  Deciding how to claim medical expenses is tricky and, apparently, TurboTax doesn’t help.

Tuesday, March 16, 2021

How to Account for High Stock Prices in Retirement Spending

I have a spreadsheet that calculates how much I can spend each month during my retirement.  However, lately I’ve felt that I really should back off somewhat from this amount because stock prices are so high.  After all, it doesn’t make sense to spend lavishly now and cut way back after a stock market crash.  Here I describe what I’ve done to account for high stock prices.

My spreadsheet estimates my safe monthly after-tax spending amount, rising with inflation, that would consume all my savings by age 100.  It assumes that total stock returns are 4% above inflation each year, before taxes and other portfolio expenses.  The spreadsheet calculates this spending amount daily as I age and my portfolio level changes (not that I need to check it this often).  I chose a 4% real stock return because it is a little lower than the historical long-term average.  This provides a modest buffer in case future returns are below the historical average.

Although I’m able to reduce my spending by quite a bit if stocks crash, I’ve had the feeling lately that my planning may be too optimistic.  This left me not fully trusting my spending figure, which defeats its purpose.

The question was what I should do about this situation.  Some people are calling for a market crash and are selling their stocks.  I don’t engage in this type of market timing.  I’m not going to change the way I invest; I just want a more realistic idea of how much I can safely spend each month.

As I write this, Robert Shiller’s well-known Cyclically-Adjusted Price-Earnings (CAPE) ratio sits at about 35.  The only time since the 1870s when it’s been higher was around the year 2000 dot-com boom when it reached about 45.

What if I assume that the CAPE will decline from today’s level to, say, 20 by the time I’m 100?  This is a decline of about 43%.  For a 50-year old, this works out to about 1.1% per year (1.4% for a 60-year old).  It seems reasonable to reduce my expectation for stock returns by this calculated annual amount. This gives a steadier spending level if the CAPE comes back to earth.

Now my spreadsheet grabs the current CAPE value from a table online and calculates the annual decline that reduces the CAPE to 20 by the time I’m 100.  It then reduces the 4% real return I expect from stocks by this CAPE adjustment amount.   (If the current CAPE goes below 20, I don’t add an amount to the 4% return.)  I was surprised to discover that this change reduced my spending level by less than I expected.

This change has two positive effects.  The first is that it should make the calculated spending level in my spreadsheet less volatile.  If stocks crash, my reduced portfolio size lowers my spending level, but it also gives higher assumed future returns (because the CAPE adjustment will be lower), which raises the spending level.  My spending level will still drop after a stock market crash, just not by as much as before I changed my spreadsheet.  

More importantly, the second positive effect of this change is that I trust that I can safely spend the amount indicated on my spreadsheet.  I’ve eliminated that nagging feeling that high stock prices invalidate my calculations.

This is the biggest change I’ve made in some time to my financial plans in retirement.  I won’t predict it’s the last, but I’m feeling good right now about trusting my spreadsheet to have me spending the right amount.

Sunday, March 14, 2021

Pre-Construction Deals Create a Dishonesty Option

If you buy a pre-construction home, both you and the builder are committing to a price in advance.  This can be a good deal for both parties in that you and the builder get some certainty in the price you’ll pay.  However, once the home is built and we see which direction housing prices moved during construction, we find out whether you or the builder came out ahead on the fixed price agreed in advance.  This creates incentives for dishonesty.

If housing prices rise before construction is finished, the builder would rather cancel the deal with you and sell the home to someone else for a higher price.  In theory, the contract you have in place prevents the builder from getting out of the deal.  In practice, there are manoeuvres the builder can try to get out of the deal with you.  The more housing prices rise, the greater the builder’s incentive to break the deal.

This creates a “dishonesty option.”  For a builder prepared to get out of the deal with manoeuvres of questionable legality if there’s enough money at stake, the original deal with you looks like a financial option, similar to a stock option.  If housing prices are flat or fall, the builder just fulfills the contract with you.  But if housing prices rise sufficiently, the builder plays games to get out of the deal.  So, from the beginning, the contract with you came with a dishonesty option to get either the contracted price or more.

This is just one of the many reasons it makes sense to do business with honest people.  I’ll leave it as an exercise for the reader to decide which recent headlines inspired this article.

Friday, March 12, 2021

Short Takes: Bleak Future in Fixed Income, SPACs, and more

I got interested in a math problem and haven’t written anything about money lately.  A researcher thought there was a mistake in a 50-year old paper about trying to choose the largest number in a sequence, but it turns out the old paper was right, and the researcher was considering a subtly different problem.  Retirement has allowed me to indulge obsessions like this now and then.

Here are some short takes and some weekend reading:

Warren Buffett’s annual letter to shareholders is out.  He says “bonds are not the place to be these days.”  “Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.”

Tom Bradley at Steadyhand explains why the odds with SPACs are stacked against the individual investor.  He also had an interesting take on why Canadians’ net worth isn’t rising as much as it seems.

In a recent Rational Reminder podcast, Ben Felix explains some interesting ideas for retirement simulations to capture serial correlations in stock returns.   Retirement simulators test the likelihood that a particular financial plan succeeds.  Few such retirement simulators take into account the fact that long-term returns tend to be lower starting from high stock prices.  Ben describes a method of changing the expected stock return for each time period based on the current CAPE (Shiller’s Cyclically Adjusted PE ratio).  If I understood correctly, the simulator would still sample from a probability distribution to choose the return for the next time period, but the mean of this distribution would be a function of the current CAPE.

Alexandra MacQueen explains the payday loan industry, including how it operates within the law.  There’s little doubt that payday loans pick the pockets of many people who are falling off the cliff to bankruptcy or a consumer proposal.  I’d like to know what proportion of payday loan customers actually use the service the way the industry claims: as a way to smooth out temporary financial problems.  Evidence for this would be the proportion of customers who pay off their payday loans and stay away from bankruptcy or a consumer proposal for, say, a year.

John DeGoey makes a good point about lowering our return expectations for the coming decade.  Some may take this to mean that it’s time to sell in anticipation of a market crash.  I don’t do this.  I just use lower future returns when deciding how much to save (pre-retirement) or spend (post-retirement).

Canadian Couch Potato takes a look under the hood of Horizons One-Ticket ETFs.  One thing that got my attention is the costs baked into the trading expense ratio:  “the three one-ticket ETFs reported TERs between 0.15% and 0.18%, pushing their overall costs to 0.29% to 0.34%.”  Another concern I have is the risks with the swap structure.  Even if we only expect a once-in-a-century 10% loss, this amounts to a 0.1% annual cost.

Preet Banerjee interviews Alyssa Davies to discuss how couples can talk about money.  Preet revealed that he’s going to be a stay-at-home dad.

The Blunt Bean Counter explains how to claim your home office on your 2020 tax return.

Friday, February 26, 2021

Short Takes: Zweig on Financial Advice, Benefits of Annuities, and more

After getting a rare haircut that was bad enough for me to notice, I was reflecting on the transition from barbers many years ago to hair salons today.  It used to be that barbers cut hair in about 5 minutes, it was inexpensive, and they did it mostly their way. You got to say how short you wanted it but not much more.  This state of affairs suited me.  Now that gender-based price discrimination in haircuts is gone, hair cutters feel the need to take 20 minutes clipping my hair a millimeter at a time to justify the high price.  Maybe we could go to a “fast cut” and “slow cut” pricing system so that I could get a simple cut quickly.  There are some women this would work for as well.  It used to be that women who wanted a simple cut were unfairly discriminated against when they had to pay the higher “women’s price.”  I would even pay today’s high price if I could just sit in the 5-minute cut chair with no waiting.

Here are my posts for the past two weeks:

Which Accounts Should I Spend from First in Retirement?

Calculating the Amount of a CPP Survivor’s Pension

Retirement Income for Life (Second Edition)

The Richest Man in Babylon

The Great Thing About Managing Other People’s Money

Here are some short takes and some weekend reading:

Michael Kitces interviews Jason Zweig, financial journalist for The Wall Street Journal, to discuss the current state of financial advice.  As a financial advisor, “you train the public to believe that portfolio management, which is such a commodity product that you can get it from a robo-advisor for a few basis points, is somehow worth 100 basis points a year when it’s not only a commodity product, but it’s not very valuable.”  “Meanwhile, the financial advice, which really is valuable, which ought to be customized and individualized and time-intensive, you’re giving it to me for free, and you’re signaling to me that you’re giving it to me for free.”  “[T]he public has been trained for decades to think that financial advice is the giveaway product and that portfolio management is like the secret sauce.”  Zweig sees this as a barrier to charging more for individualized financial advice and to letting computers do portfolio management at low cost.

The Rational Reminder Podcast interviews David M. Blanchett, head of retirement research for Morningstar Investment Management LLC, whose energy and clarity of expression made for a quality podcast.  Among other topics, he discussed the benefits of annuities.  Unfortunately, most annuity payments are very vulnerable to inflation risk.  But the analyses I see to demonstrate the value of annuities assume inflation is some low fixed value.  We can’t know future inflation with any certainty.  What if we eventually have higher inflation?  Doesn’t this uncertainty eliminate the benefits annuities bring to a retirement portfolio?

Canadian Couch Potato takes a peek under the hood of TD’s new One-Click ETF Portfolios.  He finds they have a lot more active components than he’d want.  Their management fees are a little higher than Vanguard’s Asset Allocation ETFs (0.25% vs. 0.22%).  I wonder if the activity within TD’s ETFs will generate extra trading costs or income taxes as well.

Andrew Hallam explains why he doesn’t include “play money” in his portfolio.

Tom Bradley at Steadyhand collects some Warren Buffett quotes that apply well to today’s markets.

Robb Engen gives an update on his family’s financial progress over the years.

Big Cajun Man
was one of the many Canadians whose logins for their CRA accounts were wiped out.  I had a similar experience with my Service Canada account.

Tuesday, February 23, 2021

The Great Thing About Managing Other People’s Money

The great thing about managing other people’s money is that you can dip into it to pay yourself.  This might sound unethical or illegal, but it’s perfectly legal if the owners of the money agree to it.  I use the word “agree” in a technical sense here; you really just have to get people to sign a document that points to other documents that bury the details of how you pay yourself from their investments.  You might think that once people notice some of their money is missing, they would become wise to your scheme, but most people don’t notice.  You might think that once such schemes are exposed in the media, people will see that they’ve been had, but most people who read essays like this one just don’t believe it applies to them.  The sad truth is that millions of Canadians allow others to take their money this way.

Average Canadians invest much of their savings in mutual funds, segregated funds, and pooled funds offered by banks, insurance companies, and independent mutual fund companies.  The bulk of these savings are invested in funds whose managers dip into the funds to pay themselves and their helpers at a rate that will consume between one-quarter and half of investors’ savings and investment returns over 25 years.  This fact seems so incredible that most people will feel sure that it is wrong or at least that it doesn’t apply to them.  But this draining of Canadians’ savings is real.

There are laws that require sellers of funds to disclose how much they take out of people’s savings each year.  For example, when you first bought into a fund, you might remember receiving a large document called a prospectus that you found to be incomprehensible.  Don’t feel bad; it’s designed to be incomprehensible because it contains news you wouldn’t like that might stop you from buying the fund.  At least once a year your account statements have to include information about fees that get deducted from your savings, but these disclosures are often confusing, and they don’t have to include everything you pay.

You might wonder how it’s possible that so much of your money disappears without you noticing.  The key is that it slips away a tiny bit at a time.  If out of every thousand dollars you have saved, just one dollar disappears each month, over one-quarter of your money will be gone after 25 years.  Make it two dollars per thousand that disappears each month and almost half your money will be gone in 25 years.  You may have heard that the fees taken out of your savings are some small-sounding percentage like two percent.  This isn’t two percent of your investment returns; it’s two percent of all your savings that disappears every year.  Over 25 years, this builds up to almost forty percent of your savings and returns gone.

Can’t mutual funds make up for their fees with great returns?  In general, no.  It’s nearly impossible to make up for draining away one-quarter to half of your savings over 25 years.  Every year there will be funds that do well.  But the next year different funds will do well.  Over 25 years, most funds are just average, and investors who jump from fund to fund rarely improve the situation.  The typical investor will end up with about average returns over 25 years before we account for the quarter to half the money carved away by fund managers and their helpers in fees.

Why don’t we hear more about this issue?  Much of the media, including bloggers and other financial commentators, depend on revenue from banks, insurance companies, and other businesses that make large profits from the status quo.  This isn’t a conspiracy; it’s just a normal tendency to avoid biting the hand that feeds them.  There are strong voices getting the message out about the damaging effects of high fees, but they tend to get swamped by advertising messages.

Is there anything Canadians can do about this drain on their savings without having to learn the intricacies of the stock market?  The answer is yes.  One very easy approach is to use a robo-advisor.  Another is to find one of the few mutual funds in Canada that charge much lower fees.  This requires some research into robo-advisors or lesser-known mutual funds, but it reduces the drain on your savings and returns to ten to twenty percent over 25 years.

There are even cheaper ways to invest your savings without having to learn how to pick stocks, but they aren’t widely advertised.  There are a few funds called all-in-one Exchange-Traded Funds that are inexpensive and widely diversified in global stocks and bonds.  Such funds will consume only about six percent of your savings and returns over 25 years, but nobody is breaking down your door to sell them to you.  To invest in these all-in-one funds, you first have to learn enough about them to be confident in holding them for the long term through thick and thin.  Then you need to open a brokerage account and learn to buy them.  The process isn’t complex, but it takes some nerve at first to click the button to put thousands of dollars into a fund.  The easier path is to shake the hand of a smiling mutual fund salesperson if it weren’t for the pesky problem of giving up one-quarter to half of your savings and returns over 25 years.  One of the most challenging parts of lower-cost investing is avoiding acting out of fear or greed as the stock market gyrates, something that an expensive financial advisor may or may not help you with.

Managing other people’s money is great for the managers, but not so great for investors if fees are high.  The status quo is unlikely to change much until more investors learn about the fees they are paying.  Some Canadians are waking up to better ways to invest, but the old high-cost mutual fund model is still going strong in Canada.

Monday, February 22, 2021

The Richest Man in Babylon

Back in the 1920s, George S. Clason wrote a set of pamphlets about financial success using stories set in ancient Babylon.  The book The Richest Man in Babylon gathers these pamphlets together and has sold millions of copies.  People learn better from stories than from simple facts.  This book’s interesting stories are a compelling way to internalize the basics of personal finance.

The version I read had an introduction by Suze Orman.  In addition to commenting on the book’s enduring lessons, she observed that “every character in the book is a man.”  “That’s not a reason to dismiss the heart of the book.”  “If you find the gender bias annoying, just recast all the characters in a way that enables you to read and absorb the wisdom.”  In my case, I found the repeated references to slaves more jarring than the gender bias, but I agree about the financial wisdom.

I won’t try to summarize any of the stories, but tales of kings, camels, captures and escapes, and purses full of gold are definitely more entertaining than most personal finance books.

I’m tempted to call the lessons “basic,” but when most adults could benefit from following the book’s teachings, perhaps interesting stories to drive home basic financial lessons are what the world needs.

Friday, February 19, 2021

Retirement Income for Life (Second Edition)

Those of us not lucky enough to have employer defined-benefit pensions have to save up for a decent retirement.  You’d think the challenge would be over when you’re done working and saving, but deciding how to manage your investments and how much you can spend is a new challenge.  Fortunately, former chief actuary at Morneau Shepell, Frederick Vettese’s book Retirement Income for Life: Getting More Without Saving More (second edition) shows us how to proceed with “decumulation.”  He even provides free online tools you can use anonymously.  I reviewed the first edition, and now Vettese has added new material and made significant updates to this excellent book.

Typical decumulation advice based on the 4% rule can fail.  Vettese goes through five enhancements to this typical advice to greatly improve the odds of having your money last your lifetime, without the need for any more savings.

“Many industry experts and professional associations already endorse the enhancements that are presented in this book.”  So, why is this book needed?  Because “most financial advisors are a conspicuous exception” to this endorsement because the enhancements reduce financial advisors’ compensation.  Even if these enhancements are clearly good for retirees, they cut into financial advisors’ livelihoods.

The Thompsons

Throughout the book we follow a hypothetical couple, the Thompsons, who have $600,000 in RRIFs, retire at ages 65 and 62, and are “the type of people that most readily come to mind when you think of retired people.”  “As Anthony Quinn’s titular character declared in Zorba the Greek, ‘Wife, children, house, everything.  The full catastrophe.’”

Vettese shows that if the Thompsons follow the 4% rule, they could run out of savings just 16 years into retirement if their portfolio earns poor returns.  He bases this on 1.8% MERs and 5th-percentile market returns (for a mix of stocks and bonds) with an unlucky sequence of returns where the market drops early in the Thompsons’ retirement and recovers little.  More technically, the first year return is a 5th-percentile one-year return.  Then the second year return is such that the average return of the first two years is a 5th-percentile two-year return, and so on.

Another assumption included in Vettese’s simulations is that the Thompsons’ inflation-adjusted spending will decline 1% per year in their 70s and 2% per year in their 80s.  I’ve explained before why I think this overstates how much they’ll likely want to spend less as they age.

One of the reasons future returns could be poor “is that the bond portion of portfolios will not do as well in the future because interest rates are so low.”  “It is practically impossible to obtain high returns on bonds when the starting point is low interest rates.”  “Traditional long-term government bonds will not be a great investment.”  I agree.

Throughout much of the book, we follow the Thompsons while they try to protect themselves against poor market returns.  They want to live the good life if markets perform well, but they’re most concerned with not running out of money if markets perform poorly.  The book goes through a few possible solutions before settling on Vettese’s 5 enhancements.

Alternate Ways to Try to Avoid Running Out of Money

The Thompsons could put all their money into a high-interest saving account.  If they are able to almost keep up with inflation, a simulation shows that their money could last 24 years using the 4% rule.  This is an improvement over getting 5th-percentile market returns, but it still leaves one or both of them running out of money, and it eliminates any possibility of higher returns if markets perform well.

Another possibility is to invest in real estate, but “real estate is not for amateurs.  My advice is to steer clear of this investment class (apart from your own home) and stick with stocks for capital gains.”  “The best hope for decent returns in the years to come … is to invest in stocks, risky as they are.”  Vettese settles on an asset mix of 60% stocks and 40% bonds.  In my case, I’ve chosen to put much of the “bond” part of my portfolio into high-interest savings accounts.

What about trying to get better returns by picking your own stocks?  “I used to research the market on my own and trade in individual stocks.  It was hubris to think I was smarter than the crowd.”  “I didn’t beat the market anywhere near often enough to call the experience a success.”  I’ve had a very similar experience.

Enhancement 1: Reducing Fees

The first enhancement is to reduce investment fees.  The Thompsons go from 1.8% MERs to 0.6% MERs using a robo-advisor.  Over 25 years, this reduces the fees bite from 36% to 14%.  “Simply reducing fees adds nearly three more years of RRIF income” for the Thompsons.  It’s possible to reduce fees even further if you can manage your own index ETF investments.  My own portfolio cost including MERs, commissions, spreads, trading fees within the ETFs, and foreign withholding taxes on dividends is less than 0.2% per year.

Enhancement 2: Transfer Risk to the Government by Delaying the Start of CPP Benefits

For some reason, people are jealous of the pensions government workers get, but they’re unwilling to grow their own inflation-indexed CPP payments.  “About the only good reason not to defer CPP to 70 is having insufficient assets to tide you over until CPP starts.”  Vettese goes through many reasons why people want to take CPP early and explains why they don’t make sense.  I’ve done this myself.

Enhancement 3: Transfer Even More Risk with an Annuity

Even though annuities’ built-in returns come from today’s very low interest rates, the ability to transfer longevity risk to an insurance company helps guarantee adequate retirement spending.  Vettese finds that using 20% of savings for an annuity is about right.  This goes up to 30% for those whose savings exceed a million dollars.

In my own simulations, I find that delaying the start of OAS payments to age 70 for a 36% increase in payments works better than buying an annuity.  However, this only works if you have enough assets to to tide you over until both OAS and CPP benefits start.  “High-net-worth couples should also defer OAS to 70.”

As for the type of annuity to buy, “Even if an indexed annuity made some sense, … indexed annuities tend to be overpriced, assuming you could find someone to sell it to you.”  Presumably, this means that even though indexed annuities are more valuable than fixed annuities, their prices are even higher than they should be.  Vettese advocates just buying a fixed annuity that has no annual increases in payments and using other income sources to make up for the fact that the payments will be worth less and less as the years go by.  I’d like to know if annuities with 2% annual payment increases are also overpriced or if it’s just inflation-indexed annuities.  The problem I have is that the annuity market is opaque, meaning it’s hard to get prices.

Although the main purpose of delaying CPP and buying annuities is to protect against poor market returns, Vettese finds that the Thompsons benefit even if they get median market returns.

A concern about the annuity calculations is that “The underlying interest rate for annuity purchases is 2.5 percent.  Historically this has been very conservative, but that is not the case at the present time.”  I try to be open to the possibility that I should own an annuity, but I’d want a simulation that uses actual annuity prices.

Another concern about annuities is inflation.  Vettese’s simulations assume inflation of 2.2% per year.  What if inflation is higher, even by just a little?  This would cause annuity payments to lose their purchasing power faster than the simulations expect.  People have opinions on whether higher inflation is likely, but we can’t know for certain what inflation will be over the next 3 decades any more than we can’t be certain of stock market returns.

Enhancement 4: Knowing How Much Income to Draw

Even if you’re prepared to follow Enhancements 1-3, it’s far from obvious how to decide how much you can safely spend each year.  For this Vettese provides a free Personal Enhanced Retirement Calculator (PERC) that you can use anonymously.

PERC provides three spending plans.  The first is based on 5th-percentile market returns assuming you don’t follow Enhancements 1-3.  The second is based on 5th-percentile market returns assuming you do follow Enhancements 1-3, and the third is based on median market returns and following Enhancements 1-3.  Because markets never perform as expected, you can run PERC every year or so to adjust spending and stay on course.

Vettese recommends choosing a spending level somewhere between the second and third plan.  He thinks it’s fine to base your spending on the third plan hoping for the best.  But you need to be prepared to reduce spending in future years if running PERC again reveals that your portfolio returns have been disappointing.

Enhancement 5: Have a Backstop such as a Reverse Mortgage

“Fully implementing enhancements 1 to 4 make anyone’s decumulation strategy practically bulletproof.”  But if something extraordinary happens and you do run out of money, a possible backstop if you have a home is a reverse mortgage.

With a reverse mortgage “You cannot be forced to move out,” but “You do have to maintain the home.”  This requirement to maintain your home worries me.  The elderly family members I’ve helped got to the point where they couldn’t maintain their homes, but still didn’t want to move.  Reverse mortgage lenders are just growing their business today and wouldn’t want the bad press of forcing old people out of their homes.  But let’s fast-forward a decade or two to the time when lenders have many loans on their books where the debts are approaching or exceeding the value of the home.  It might be profitable at this point to send out inspectors to see if any old people can be forced out because of poor maintenance.

Other Situations

To this point, the book focused on a typical retired couple who are long-lived.  Vettese goes on to examine other situations, such as one spouse dying young.  Even in this case, he finds that delaying CPP and buying an annuity still help.

Another different situation is early retirement.  Vettese finds that if the Thompsons wanted to retire 5 years earlier with the same income, they would need $1.3 million in RRIF assets instead of $600,000.  Part of this increase comes from needing to cover 5 extra years of retirement, and part of it comes from reduced CPP benefits.  When I tried to confirm this with PERC, I found that the Thompsons only needed about a million dollars for the earlier retirement.  I’m not sure why this doesn’t agree with Vettese’s figure.

One may wonder whether it makes sense for younger retirees to delay CPP benefits past age 60 because the lack of CPP contributions from 60 to 65 will reduce benefits.  The answer is that this dilution “is more than offset by the early retirement reduction factor.”  (Under CPP rules, there is no additional dilution from making no CPP contributions from 65 to 70.)

It can be challenging to decide whether to spend from RRSPs/RRIFs, TFSAs, or taxable (non-tax sheltered) accounts first.  In PERC, “I have assumed that income each year in retirement would come from a blend of all the asset classes.”  However, Vettese explains how to spend from some accounts first “to maximize after-tax income.”  I’ve devised a plan for myself to draw from my accounts to increase the amount of after-tax spending I have available.

Other different situations covered include single people and bequests and inheritances.

Other Interesting Comments

On mutual fund Deferred Sales Charges (DSCs), “To me, [charging DSCs] is one of the most odious practices a fund salesperson can perpetrate on an innocent investor.”  “Do not trust anyone who has recommended investment funds with a DSC.”

“Employers have an excellent business case for maintaining a [defined contribution] pension plan for their employees.”  “The same business case strongly suggests that employer support should continue beyond retirement” to help “during the decumulation phase.”

“It is a fair guess that fewer than a dozen people in Canada can explain how the survivor pensions under the CPP are calculated.”  Vettese goes on to explain how to calculate a CPP survivor’s pension.  However, I found that his description is different in one respect from other descriptions I’ve read.


The intended audience for this excellent book is “people who are close to retirement, or who are already retired, and who are going to rely heavily on their own savings to meet their retirement income needs.”  This audience will get solid advice on the best way to handle decumulation of their savings through retirement.  One reservation I have about the five proposed enhancements is buying a fixed annuity.  It may be that buying such an annuity is best, but to confirm this, the simulations need to use current annuity prices and consider a reasonable range of inflation outcomes.  That said, retirees who simply follow all Vettese’s advice and use his free Personal Enhanced Retirement Calculator (PERC) will very likely have better outcomes than if they follow typical retirement spending advice.