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.

Thursday, February 18, 2021

Calculating the Amount of a CPP Survivor’s Pension

Some people have heard that when a spouse dies, the surviving spouse gets a survivor’s pension equal to 60% of the deceased spouse’s CPP pension.  Unfortunately, the actual calculation involves many more steps, and the final amount of the survivor’s pension is often much less.  Here I pull together information from 3 sources to piece together how to calculate the amount of a CPP survivor’s pension.

My main source of information is Doug Runchey’s Understanding the CPP Survivor’s Pension.  I used Frederick Vettese’s book Retirement Income for Life (second edition) to corroborate Runchey’s calculations (although they didn’t completely agree), and Kea Koiv’s Shedding Light on the CPP Survivor Benefit added extra detail for young surviving spouses.  In the end there are still some subtleties I’m unsure about.  I have not tried to determine how these calculations change when either spouse is receiving a CPP disability pension.  Expert feedback is welcome.

To be precise and clear, I define several quantities below and how they’re calculated, culminating in the survivor’s pension amount.

D – Deceased spouse’s basic retirement pension

If the deceased spouse has been receiving a CPP pension that started at age 65, then D is just the amount of the pension.  Otherwise, it is what the deceased spouse’s pension would have been if he or she had taken CPP at age 65.  So, if the pension had been actuarially reduced because it started before age 65, or was increased because it started after age 65, D is the amount after taking away this actuarial adjustment (currently 0.6% per month reduction before 65 and 0.7% per month increase after 65).  This is what Runchey calls the “calculated retirement pension.”

If the deceased spouse had not begun taking a CPP pension, there are complex rules for determining D that I won’t try to capture here.

One subtlety I’m not sure about is if taking away the actuarial adjustment is all that is done to calculate D.  One part of the difference in CPP pension levels between taking it at 65 versus taking it earlier is that it changes the number of contribution months that can be dropped out, and it changes the number of contribution months that get averaged together.  It’s not clear to me whether D comes from just removing the actuarial adjustment or whether we go back and completely redo the contribution months calculation based on an age 65 start to CPP benefits.

L – Living (surviving) spouse’s basic retirement pension

This is similar to the deceased spouse’s basic retirement pension D, except that if the surviving spouse had not yet begun to take CPP, we use L=0 for now for calculating the survivor’s pension.  When the surviving spouse starts receiving CPP benefits, this whole calculation is revisited, and the survivor’s pension will likely be reduced.

M – Maximum basic retirement pension

This is the maximum CPP pension when started at age 65.  Currently, this is $1203.75 per month, excluding the recent CPP enhancements.

X – Maximum survivor’s pension

This is the amount of the survivor’s pension if the surviving spouse receives no CPP pension (L=0).  If the surviving spouse is receiving a pension, then this quantity (X) will get reduced as explained below to get the actual survivor’s pension.

If the surviving spouse was 65 or older, then X = 60% of D.  If the surviving spouse is between 45 and 65 or disabled or raising dependent children, then X = (37.5% of D) plus the flat rate benefit.  The current flat rate benefit is $199.31 per month.  If the surviving spouse is between 35 and 45, not disabled, and not raising dependent children, then the age 45 value for X is reduced by 1/120th for each month younger than 45 (dropping to zero at age 35).

R – Survivor’s pension reduction

R = the lesser of (40% of X) or (40% of L).

It wasn’t completely clear in Runchey’s article whether we include the flat rate benefit part of X in this calculation when the surviving spouse is under 65.  I have assumed that it is included in X.

S – Survivor’s pension

S = the lesser of (X - R) and (M - L).

This step is to ensure that the surviving spouse’s total CPP benefits don’t exceed the maximum (M).  Vettese’s book says S is the lesser of (X - R) and (D - L), which would mean that the surviving spouse’s total benefits can’t exceed the deceased spouse’s benefits.  I suspect that Runchey’s version is correct.  Perhaps this is just an oversight by Vettese due to the fact that he gave an example where the deceased spouse’s CPP benefits (D) were close to the CPP maximum (M).

F – Surviving spouse’s actuarial reduction factor

Based on Runchey’s explanation, there is an extra amount for a surviving spouse who started his or her pension before age 65 (see Y below).  If the surviving spouse started CPP at age 65 or later then F = 0.  Otherwise, F is the percentage L was reduced by in the actuarial adjustment to calculate the surviving spouse’s own pension.  Under current rules, this is 0.6% times the number of months before age 65 that the surviving spouse began his or her CPP benefits.

Y – Special adjustment to the surviving spouse’s pension

Y = F * R.  This appears to be considered a separate amount from the survivor’s pension, although it certainly seems like part of the survivor’s pension.  It’s not clear whether this special adjustment is subject to any maximum similar to the way S was capped at (M - L).


Consider a very simple example where both spouse’s receive $800 per month and had started their pensions at age 65.  Then when one spouse dies we have  
D = L = $800, X = $480, R = $192, and S = $288.

If both spouses had received $1100 per month instead of $800, this changes to
D = L = $1100, X = $660, R = $264, and S = $103.75.
In this case, the survivor’s pension is limited by the maximum allowable CPP benefit (M).

It’s clear that in most cases, a survivor’s pension is smaller than the often repeated 60% of the deceased spouse’s pension.  The calculation is complex and there are still some details I’m not completely sure about.

Tuesday, February 16, 2021

Which Accounts Should I Spend from First in Retirement?

For those of us retiring without employer pensions, it’s a challenge to find the best way to spend the savings in our various accounts, a process called decumulation.  Most of us have RRSPs/RRIFs (or other tax-deferred accounts) and TFSAs.  Some of us also have taxable (non-registered) accounts.  Even after we decide how much we can safely spend each year, it’s not obvious which accounts we should spend from first.  Here I describe how I spend from my accounts.  It may or may not work well for people whose financial circumstances differ from mine.

While working, our spending is usually closely linked to the income we declare on our taxes.  If we start with declared income and subtract taxes and savings, the rest is what we spent.  In retirement, it often doesn’t work this way.  If we spend from TFSAs or from taxable accounts, our spending can exceed the income we declare on our taxes.  This gives us some control over our reported income even when we’ve already decided how much we’re going to spend for the year.

As a general rule, deferring taxes is a good idea.  So, we might think that spending from taxable accounts and TFSAs first and RRSPs/RRIFs last would make sense.  But I didn’t find this to be true in my case.

My Decumulation Approach

To begin with, my simulations indicate that I should keep transferring assets from my taxable accounts to my TFSAs each year, and delay spending any TFSA money until the taxable accounts are gone.  Even then, it makes sense for me to reserve part or possibly all of my TFSAs in case I need to make large expenditures.  If I ever had to dip into an RRSP/RRIF to buy a car, help a family member, or pay for a medical emergency, the spike in the income I’d have to report on my taxes that year would be expensive due to Canada’s graduated rate tax system.

So, now it would seem that the correct spending order is taxable accounts, then RRSPs/RRIFs, and finally TFSAs.  However, if I do this starting today, I’d be declaring a low income consisting of just the interest, dividends, and capital gains from my taxable assets.  My simulations show that I’m better off spending from my RRSPs to top up my income to fully use the low tax rate brackets.  This is a trade-off between giving up some tax deferral to make a lightly-taxed RRSP withdrawal today versus a more heavily-taxed withdrawal in a future year.

So, each year early in December, I estimate my income and my wife’s income from all sources, and then take out enough from our RRSPs to take both of our incomes to the top of the second tax bracket.  I live in Ontario, and for 2021 this second bracket ends at an income of $49,020.  Others may find that staying within the first bracket or moving into the third bracket is better, depending on how much money they have saved.  The bulk of our spending today is from taxable assets, but with this topping up of tax brackets, some of it is from RRSPs.

As we get closer to our first forced RRIF withdrawals when we’re 72, it will become clearer whether the total income from CPP, OAS, and RRIF withdrawals (and possibly annuities if we buy any) will drive us into high tax brackets and possibly OAS clawbacks.  If it becomes clear that this won’t be a problem, then we’ll just continue as we have been from now until we’re 72.  If it looks like we’d be paying high taxes due to big RRIF withdrawals after we’re 72, we would start drawing larger amounts from our RRSPs/RRIFs in the years leading up to age 72.  This would have an income smoothing effect designed  to increase our total after-tax spending.

Depending on how large our TFSAs get, sometime after the taxable assets are gone we may start spending some of our TFSA assets each year to reduce the amount of RRIF income we need to draw.  Whether this makes sense will become clearer in our 70s.

This may seem like a lot to worry about, but fortunately, this is a very slow-moving problem.  We really only need to think about these issues once per year.  And likely, small course changes determined by portfolio returns and tax law changes will only be necessary every 5 or 10 years.

Feedback is welcome.  I don’t claim to have the perfect plan, and I certainly can’t say my approach will work well for others.  But I do think it will work well enough for me.

Friday, February 12, 2021

Short Takes: Wall Street Wins with GameStop, Fee Transparency, and more

More stories are starting to come out about people in positions to influence vaccine rollout abusing their power to vaccinate themselves and their family and friends.  I assume that for every administrator who gets caught, a great many did the same thing but didn’t get caught.  This abuse is reprehensible, but predictable.  Fortunately, unless someone is actually reselling vaccine doses, each abuser’s incentive to break the rules goes away after the first offense.  Hopefully, we’re mostly through the loss of doses to corruption and we can move on with vaccinating health care workers and older people followed by the rest of us.

Here are my posts for the past two weeks:

Early Retirement Extreme

Stock Tapering: Adjusting Your Asset Allocation Based on Market Price-Earnings Ratio

Broke Millennial Talks Money

Declining Spending as We Age

Here are some short takes and some weekend reading:

Josh Brown has one of the better discussions of the clash between Robinhood traders and hedge funds over GameStop stock and other companies.  This will end with Wall Street pros making a pile of money (on average) and Robinhood traders losing that money (on average).  Tom Bradley also had a good take on this saga.  Yet another interesting take came from Preet Banerjee on the gamification of trading.

Tom Bradley at Steadyhand says “The wealth management industry is pathetic when it comes to transparency."  He encourages investors to dig into their recent portfolio statements to see how much they’ve paid in investment fees.

Preet Banerjee interviews Silvio Stroescu, President of BMO InvestorLine to discuss the huge increase in demand for online brokers during the pandemic.  Stroescu explains that the long wait times for their agents is due to the large increase in calls.  Although I’m overall a happy InvestorLine customer, I’d be happier if they stopped charging me interest on phantom short positions that arise because of one-day delays between different parts of their computing platforms.  They always reverse the interest charge, but having to call in each time to fix the problem is annoying.

Boomer and Echo
explains human capital.  People whose incomes are risky have human capital that is “stock-like and therefore they can ill-afford to take on much risk in their financial capital and should hold more cash and guaranteed investments to hedge against a volatile profession.”  When we compare stocks to bonds, stock returns are riskier, but they have a higher expected return than bonds.  With incomes, it’s often the case that an income is risky without the corresponding higher expected return compared to less risky professions.  For this reason, those with risky incomes are likely better off responding with a high saving rate so they can build a large emergency fund.  Then they can seek the higher returns on savings that one gets from stocks instead of letting their savings languish in bonds.

The Rational Reminder Podcast features William Bengen, the original researcher behind the 4% rule.

Kerry Taylor interviews Andrew Hallam to discuss the science behind why more stuff won’t make you happy.

The Blunt Bean Counter points to a number of resources for deciding how much you need to save to be able to retire in Canada.

John Degoey
has a take on future return expectations that are well below historical averages.

Canadian Couch Potato
explains what happened to last quarter’s distribution from the TD e-Series International Index fund.

Big Cajun Man tells the story of how “chutzpah” was an important part of a job interview he once had, but not in the way you might think.

Tuesday, February 9, 2021

Declining Spending as We Age

As we age in retirement, our inflation-adjusted spending declines.  This fact has been established in numerous academic studies.  The question is how we should incorporate this information into our retirement planning.  Former chief actuary at Morneau Shepell, Frederick Vettese has an answer to this question in the second edition of his excellent book, Retirement Income for Life.  Here I lay out the consequences of this answer in concrete terms.

In Vettese’s earlier book The Essential Retirement Guide: A Contrarian’s Perspective, he wrote that our tendency to spend less as we age means we can assume that retirement spending “does not have to be indexed to inflation.”  I argued that this isn’t reasonable because some of the spending decline measured in academic studies comes from some retirees who spend too much early on and dwindling savings forces them to spend less later.

In the first edition of Retirement Income for Life, Vettese changed his assumption to an annual 1% decline of inflation-adjusted spending in one’s 70s and an annual 2% decline in one’s 80s.  This amounts to about a 13% reduction in the present value of lifetime retirement spending.  He kept the same assumption in the book’s second edition.  Most of my concerns about the academic study data still apply to his justifications of this spending pattern.

A Concrete Scenario

Let’s leave the academic discussions and look at the implications of Vettese’s spending pattern.  Suppose you are married and retiring at 65 with the plan to spend $60,000 per year initially.  This includes CPP, OAS, RRIF withdrawals, and all other sources of retirement spending.  Suppose further that you have two couples as neighbours who are in the same socioeconomic class as you are, but one couple is 55 and the other is 45.

As a result of the progress we see in society over the decades, wages rise faster than inflation.  Let’s assume that wage increases will exceed inflation by 0.75% per year.

Now fast-forward 10 years.  Adjusted for inflation, your plan has you spending $56,000 per year at age 75, while your neighbour who is now 65 is spending $65,000 per year.

Now fast-forward another 10 years.  Adjusted for inflation, your plan has you spending $48,000 per year at age 85, while your other neighbour who is now 65 is spending $70,000 per year.

Is this Reasonable?

If this sounds sensible to you, then by all means, plan for significant spending declines during your retirement.  I suspect, though, that if we could modify academic studies to remove data from people whose spending declines were forced upon them, we’d see age-related spending declines begin later in life and be less severe.

My own choice is to assume my spending will keep up with inflation, so that the only decline I’ll see is that my spending won’t keep up with rising wages.  However, I could see using an assumption of a 1% annual spending decline from age 75 to 90 as quite reasonable.  This is about half the decline Vettese uses.

Vettese has an interesting theory about why so few planners take into account spending declines: “If we fail to acknowledge the true spending patterns of older retirees, political correctness may have something to do with it.  The mere suggestion that older people don’t need quite as much money can come across as senior-bashing.”  He may be right about some planners, but this isn’t my motivation.

I don’t want to overstate the importance of this issue.  I consider my disagreement with Vettese on this point to be fairly minor.  His books are among the best available on how to spend your money in retirement.

We’re not all the same, and one spending pattern won’t fit all retirees.  Before agreeing to use any planned decline in spending, it’s best to think about the amounts in actual dollar terms to make sure you find it acceptable.

Monday, February 8, 2021

Broke Millennial Talks Money

Money is an uncomfortable subject in many contexts.  In her book Broke Millennial Talks Money, Erin Lowry explains why it’s important to discuss money and how to proceed in sensitive or awkward situations.  The book covers financial discussions at work and with friends, family, and spouses.  Lowry even includes dozens of scripts to use to kick off a healthy financial discussion.  The book is aimed mainly at American Millennial women.

Even if you agree that talking about money makes sense in a given context, it’s often hard to find the right words to begin.  This book contains over a hundred short scripts to get started in a discussion.  There are also suggestions for overcoming the natural resistance people have to talking about money.

The first part of the book is about financial discussions at work.  To find out if you’re underpaid and to gather information before negotiating pay, it’s often necessary to talk to coworkers about how much they get paid.  This is a delicate subject, and Lowry gives suggestions such as asking someone if their salary is higher or lower than a given number instead of asking for the exact figure.  Given how often Millennials change jobs, negotiating pay is an important skill.

“One of the most uncomfortable truths in adulthood is the reality that you and your friends are not in the same place financially.”  This has been less of a problem for me than it has been for my wife.  I don’t know how far our experience carries over to other men and women, but I find that my friends and I just accept wealth differences among us as a simple fact.  My wife reports a lot more troubles with financial inequalities among her friends.

“Sharing your salary with friends is generally an enormous risk.”  This one applies to me.  It’s one thing to know that a buddy is wealthier, but it’s quite another to see it in numbers.  I generally avoid specific numbers for income and portfolio size with my friends.

Lowry’s warning about sharing salary figures with friends doesn’t carry over to debt levels.  She suggests that sharing debt amounts with friends can “deepen bonds,” explain why you might sometimes “decline invitations,” and give you some “built-in accountability” on your journey out of debt. However, “Loaning money to friends can be a quick way to lose them.”

The chapter I liked best was on talking about money with your parents.  One day they will likely need help with day-to-day handling of money, and it’s best to learn about their financial details and get powers of attorney in place before the first health emergency.

We’re used to hearing about elder financial abuse by family, but abuse can go the other way.  Parents have been known to steal the identities of their children to borrow money on their good credit.  “Rectifying the situation usually requires you to press charges against a family member, something a lot of people, no matter how toxic the relationship, aren’t willing to do.”

For a book that does a good job of understanding where people with different outlooks on life are coming from, I found it interesting that the author takes it as given that when it comes to child care it’s unreasonable to think “I don’t want my kids raised by someone else.”

In conclusion, this book offers a lot of specific advice and scripts for having necessary but uncomfortable financial discussions with coworkers, bosses, friends, parents, other family, and spouses.  Some parts are specific to U.S. laws, and much of it is aimed at Millennial women.

Thursday, February 4, 2021

Stock Tapering: Adjusting Your Asset Allocation Based on the Market Price-Earnings Ratio

Current stock market prices are high compared to corporate earnings.  What should investors do with this fact?  Index investors are told to ignore the possibility of a stock market bubble and stick to their plans.  Is it possible for investors to adjust their asset allocations to take into account market “priceyness” in a mechanical strategy that doesn’t involve gut-based decisions?  Here I examine one possible approach I call Stock Tapering.

One popular measure of stock market levels is Robert Shiller’s Cyclically Adjusted Price-Earnings Ratio (CAPE Ratio).  As I write this, the CAPE stands at 34.86, a level only seen once before during the late 90s tech boom when it peaked at about 45.

As an index investor, I’m not interested in making active decisions like market timers who may decide to sell all their stocks because their trick knees tell them stocks are going to crash.  I’m also not interested in mechanical strategies that make hard switches such as selling all stocks whenever the CAPE exceeds 40.

Stock Tapering

Suppose I decide to stick with my “normal” asset allocations whenever the CAPE is below 35, but multiply my stock allocation by 35/CAPE when the CAPE is above 35.  For example, my current plan has me 80% in stocks.  However, if the CAPE gets to 40, I’d reduce my stock allocation to 80%*35/40 = 70%.  If the CAPE kept rising to 50, I’d lower my stock allocation to 56%.  Let’s call this P/E-informed asset allocation strategy Stock Tapering.

The theory behind Stock Tapering is that a market crash is more likely when stocks are high, and having a lower stock allocation would save money during a crash.  As long as the calculations are automated in a spreadsheet, it wouldn’t be too hard to combine these stock allocation adjustments with normal portfolio rebalancing operations.

We can certainly imagine scenarios where this CAPE-based asset allocation adjustment could work very well.  But what are the risks of this strategy?

CAPE Rises to 50 and Stays There

Suppose that stock prices keep rising until the CAPE is 50, and then it stays near that level for decades because there has been a permanent reduction in market risk aversion.  The result is that with Stock Tapering, you’d have a permanently reduced stock allocation leading to lower returns for the rest of your life.

However, in the short term you’d get the benefit of huge portfolio growth as the CAPE rose from the current 34.86 to 50.  If you’re already retired with a substantial portfolio, this increase would likely make up for decades of slightly lower future returns, so this scenario wouldn’t be much of a risk.

Note that if you chose 25 instead of 35 as the CAPE level where you start lowering your stock allocation, you may not fare so well if the CAPE stays in the 35 range for decades.  This is because the CAPE is already near 35 today and you’d never get the portfolio boost of the CAPE rising from 25 to 35.

CAPE Rises to 50 Because Corporate Earnings Drop

In the previous scenario, we assumed that the CAPE moves up and down mainly because of movements in stock prices.  What if the CAPE rises because of a big drop in corporate earnings?  The result is that with Stock Tapering, your future reduced returns due to a lower stock allocation would make this strategy work out poorly.

Earnings Volatility

Imagine for a moment that stock prices stay constant for a period of time, but corporate earnings move up and down.  The Stock Tapering strategy would trigger rebalancing trades that increase costs but don’t produce any profits.


In general, with any scenario where we have CAPE changing due to stock price movements, Stock Tapering works well, but it reacts poorly to earnings volatility.  On balance, I don’t know if Stock Tapering is a good idea.  Without further analysis that leads to a favourable outcome, I’m not inclined to try it.  So, I still don’t have a good idea for how to adjust my asset allocation in the face of soaring stock markets.

Monday, February 1, 2021

Early Retirement Extreme

When I first picked up Jacob Lund Fisker’s book Early Retirement Extreme, I expected it to be similar to other early retirement books I’ve read, but it isn’t.  This is a thoughtful philosophy book that lives up to its subtitle A philosophical and practical guide to financial independence.  If I had read it decades ago, I likely would have retired even sooner.

The book begins with the claim that modern life is like the movie The Matrix.  We can’t see the crazy way we live our lives as wage slaves.  We give up our most productive hours to a job that leaves us with too little energy to do much other than waste money on stuff we don’t have the time to enjoy.  If your instinct is to disagree, consider reading the book; Fisker makes an excellent case.

“Ignore most of the personal finance books out there.  They only explain how to play the game by the rules.  Instead, use the rules to play a different game” outside the Matrix.

It’s easy to pick out parts of the book that are extreme enough to seem crazy:  “it’s possible to live on a third or even a quarter of the median [U.S.] income,” central heating is “an uneconomical product,” “to adapt to cold, try switching to cold showers,” and “you can make clothes hangers out of cardboard boxes.”  However, it isn’t necessary to agree with Fisker on all points.  If you accept only part of his philosophy, you could end up with a more fulfilling life and fewer years on the job.


Here are examples of points the book makes on the way to building a philosophy for a different way of living.

“If you have debt, you’re not a free person.”

Our measures of success make little sense: “spending half an hour in a traffic jam getting from A to B in an expensive car is considered more successful than spending half an hour in a traffic jam getting from A to B in a cheap car.”  “Similarly, it’s considered more successful to sit on a couch in your home, if there is an additional unused couch in an additional unused room, compared to a house with no unused couches or no unused rooms.”

To have work-life balance, “one solution is to moderate one’s career ambitions.”  It’s best to realize “at an early point that going all the way [to the top of a career path] not only depends on skills, but also requires 100% dedication, reading time, and possibly some ethical compromises.”  I was fortunate to figure out early in my career that I wasn’t interested in management and the dedication of time it requires, even though that would have been a path to higher pay.

“People don’t seem to realize that the quest to bring more possessions in through the front door is a chronic disease, and that the shortage of space is a symptom rather than the underlying problem.”

“The kind of retirement most people are familiar with and dream about … revolves around spending money.”  This applies to my lifelong dreams of financial independence.  Now that I’ve achieved it, I’m unlikely to stop spending money faster than Fisker advocates.

People “spend their most productive hours and years in a job which they don’t really care about, after which they go home exhausted to deal with spouse, kids, dinner, bills, trying to keep up with the neighbors, and languishing in front of the TV because they have little energy left.”

We should “reverse the outsourcing of ordinary life skills and gradually insource skills” such as meal preparation and mending clothes.

“Happiness does not stem from being surrounded by possessions.”  “Being surrounded by them is the result of an addictive habit.”  If you analyze how often you use all your possessions, “Don’t be surprised if you use fewer than three percent of your possessions daily and 90%+ of all possessions less than annually.”  However, the author isn’t an extreme declutterer; he just seeks to own the things that serve him best.

Many houses have “restaurant-sized kitchens which seem proportional in size to the time the owners spend away from them, eating out.”  “Either buying or renting a home that is priced at several times your annual income is a huge financial mistake.”

More Specific Advice

“The best way to think about cost is not the sticker price,” but rather the annual cost.  If an item lasts 10 years, the annual cost is one-tenth of the sticker price.  Or even better, if you can buy something used and later sell it, your annual cost could be extremely low or even negative.

“Including home value in one’s net worth is an academic exercise, as this part of net worth is irrelevant to financial independence.”  This makes sense to a point, but I think it becomes less true in old age.  If you plan to use a reverse mortgage or sell a home before moving to a retirement home, the value of your home matters to your financial independence.

“I’d consider it normal to … be able to run five miles, walk 25 miles, or bike 50 miles.”  People would do well to drive less and exercise more.  I work hard to stay in decent shape, and I’ve maintained decent fitness standards.  However, when you’re young, injuries are rare, and you can often just work around them to run, walk, or bike.  As I’ve aged, the number of days I can’t do these things well due to one injury or another has been climbing, and I can’t control the timing of when I won’t be able to travel distances without motorized transportation.

When it comes to college or university, “pursue something you’re good at rather than something you’re passionate about” and “consider typical [job] placement rates.”  Further, “calculate the internal rate of return” on the cost of the degree and the increased income you expect.

Working intermittently with frequent time off works for some occupations, such as tax accountants, contractors and handymen, but “doesn’t work well for salaried career professionals.”  I’ve always been skeptical of advice to take many extended work breaks or plan to work part-time during retirement, but maybe that’s because I was a salaried career professional.

“I would use [3%] as a safe withdrawal rate” in retirement.  For a very early retiree, I agree.  Trying to make your money last for 60 years or longer calls for less than the usual 4% advice.

Index Investing

When it comes to investing, Fisker invests in the stock market but is derisive about indexing.  “People are told to buy index funds” because of “a lack of knowledge.”  He discusses an example where assets yield 4% “without effort,” but this rises to 6% using “asset management,” whatever that means.

“At the highest level there are people who create new rules, that is, they find some aspect of the market and the economy that allows them to predict more correctly what the future price of an asset will be.”  However, Fisker later says that “preservation of principal, keeping up with inflation, minimizing taxes, and providing a stipend [are] more important than outperforming the market.”

I can’t comment on the author’s own investing skill, but the vast majority of people are incapable of beating low-cost index ETF investing over the long term.  Working on your investing skill pays off handsomely up to the point where you know how to minimize costs.  Working further toward beating the market is likely to deliver a negative wage.

About the Author

“Upon graduating with a PhD in theoretical physics, I worked for five years as a research associate while saving around 75% of my net income and then retired with enough money to last me the rest of my life.”  Fisker now lives off his income and controls his spending by being his own “personal cook, trainer, carpenter, electrician, mechanic, accountant, financial advisor, tailor, engineer, etc.”


This book is unlike any other early retirement book I’ve read.  The author is very thoughtful and offers a philosophy rather than a template to follow.  Whether you agree with 10% or 90% of what he has to say, you are likely to see your life differently after reading this book.  When I examine my life in his terms, I realize that I have followed his philosophy to a modest degree.  I might have been better off if I had followed it more.