Wednesday, May 25, 2022

Why Do So Many Financial Advisors Recommend Taking CPP Early?

No doubt there are many financial advisors out there who do a good job of advising their clients on when to start their CPP benefits.  However, I frequently encounter advisors who declare that they always advise their clients to take CPP at 60.  Given the significant benefits of delaying the start of CPP benefits for those with sufficient assets or income to wait, why are some advisors so adamantly against it?  Here I offer some possible reasons.

According to Owen Winkelmolen, in 2018, 38% of Canadians took CPP at 60, only 7% waited until after they were 65, and only 2% waited until they were 70.  This certainly doesn’t suggest that many financial advisors advise their clients to delay CPP.

So, here are some possible reasons why so many financial advisors recommend taking CPP early.

Higher Assets Under Management (AUM)

When clients take CPP early, they spend less from their savings, and this increases the advisor’s AUM.  This is true, but the effect isn’t big, and it’s hard to imagine that many advisors are scheming to get a small bump in AUM.  For those advisors who are effectively salespeople, it’s possible that this is a motive for the organizations they work within.

Advisors are simply repeating what they were taught

It’s possible that advisors were taught that starting CPP early is best, and they’re simply repeating what they were taught.  This seems plausible for those advisors who work essentially as salespeople and whose training came primarily from their sales organization.  This seems less plausible for advisors who have more substantial training.

Some advisors have the same emotional need to take CPP early as their clients

Canadians have a strong bias toward taking CPP early for a variety of emotional reasons.  Perhaps some advisors have the same emotional reaction.  They intend to take their own CPP early, and they advise their clients to do the same.

Maintaining the illusion that they will bring client big returns

Less scrupulous advisors sell their services to potential customers (clients) by claiming they can generate high investment returns.  Perhaps claiming to be able to outperform the CPP increases that come from delaying the start of benefits is simply a matter of being consistent with the claimed ability to crush the market.

Haven’t kept up with CPP changes

Before 2011, starting CPP benefits before age 65 cost 0.5% per month.  This is now 0.6%.  Before 2011, starting CPP benefits after age 65 increased benefits by 0.5% per month.  This is now 0.7%.  A dozen years ago, the case for delaying CPP was much weaker than it is today.  Perhaps some advisors haven’t kept up with these changes.

Don’t understand how inflation indexing of CPP benefits affects this decision

I’ve seen detailed examples advisors provide where they conclude that you’re better off to take CPP early and invest the money.  However, these analyses ignored inflation.  CPP benefits are indexed to wage inflation before you start CPP, and they’re indexed to the consumer price index after you start CPP.  A flawed analysis might conclude that earning x% on your investments justifies taking CPP at 60.  A proper analysis would say that your portfolio has to beat inflation by x%.  See Taking CPP and OAS Early to Invest for a full explanation.

It’s too hard to bother fighting with clients who want to take CPP early

Clients have strong emotional reasons why they want to take CPP early.  The amount of money at stake may not seem very much from the advisor’s point of view, and it’s just easier to tell clients what they want to hear rather than fighting them.  Many lists I see with reasons to take CPP at 60 include some version of “you (or the client) want to start CPP early.”  All decisions are ultimately up to the client, and advisors have to be selective about when to push back if they don’t want to lose the client.

After advising early CPP for years, to change now is to admit past mistakes

Nobody likes to admit they’re wrong, to themselves or anyone else.  If you’ve spent a career advising your clients to take CPP early, the only way to protect yourself from finding out you’ve been giving bad advice is to ignore evidence and keep advising clients to take CPP early.

In recent years, several sensible analyses of the benefits of delaying CPP have appeared.  But, many advisors are undeterred.  I’d be interested to hear expert insight into the dominant reasons for this lack of reaction from many advisors.

Monday, May 23, 2022

Taking CPP and OAS Early to Invest

A strategy some retirees use when it comes to the Canada Pension Plan (CPP) is to take it at age 60 and invest the money.  They hope to outperform the CPP increases they would get if they delayed starting their CPP benefits.  Here I take a close look at how well their investments would have to perform for this strategy to win.  I also repeat this analysis for the choice of whether to delay the start of Old Age Security (OAS).

This analysis is only relevant for those who have enough other income or savings to live on if they delay CPP and OAS.  Others with no significant savings and insufficient other income have little choice but to take CPP and OAS as soon as possible after they retire.

How CPP Benefits Change When You Delay Their Start

You can start your CPP benefits anywhere from age 60 to 70, with 65 considered to be the normal starting age.  For each month that you start CPP benefits before you turn 65, your benefits are reduced 0.6%.  So, suppose you’d be entitled to $1000 per month if you were 65 today.  If instead you were 60 today, you’d only get $640 per month starting CPP now.

For each month that you start CPP benefits after you turn 65, your benefits are increased 0.7%.  If you were 70 today, you’d get $1420 per month starting CPP now.


The previous examples glossed over the effects of inflation.  In reality, if you were 60 today, you’d have to wait 5 or 10 years if you choose to take CPP at 65 or 70.  During that time, inflation adjustments would affect your CPP benefits.

Continuing the earlier example, if you take CPP now, you’d get $640 per month.  These benefits would rise over time with the Consumer Price Index (CPI) at the rate of price inflation.  However, if you wait until 65 to start CPP, you’d get a lot more than $1000 per month.  This $1000 per month would rise with 5 years of wage inflation.  That’s because CPP benefits increase with price inflation after they begin, but before they begin, they increase with wage inflation.

So, if you started CPP at 65, you’d get $1000 per month plus 5 years of wage inflation.  Wages usually rise faster than prices, so the delayed $1000 per month would rise by more than the non-delayed $640 per month.  In my analyses here, I assume that wages rise 0.75% per year faster than prices.  Assuming price inflation of 3% per year, by the time you reach 65, the CPP benefits you started 5 years earlier would be $742 per month, and your delayed benefits would be $1203 per month.

If you started CPP at 70, your benefits would be $1420 plus ten years of wage inflation.  If we turn you into triplets with identical CPP entitlements who take CPP at different ages (60, 65, and 70), their monthly payments at age 70 would be $860, $1395, and $2056, respectively.

A Dropout Penalty

There are some technicalities that I’ve glossed over so far.  My analyses here don’t take into account cases where people keep working after they start CPP to get additional CPP benefits.  I also don’t take into account CPP disability benefits.  One technicality that I do examine is the effect of not fully contributing to CPP from age 60 to 65.

Your CPP benefits are based on your average contributions paid into CPP.  However, you get to drop out 17% of your contribution months with the lowest contributions.  This increases your average contribution per month and gives you higher CPP benefits.  People who look after children under 7 and those with disabilities get additional dropouts.  If you take CPP at 60, you drop out your lowest contributing months between age 18 and 60.  If you take CPP at 65, you drop out your lowest contributing months from age 18 to 65.

So, if you don’t contribute to CPP after age 60, but you wait until you’re 65 to start CPP, you’ll need to use many of your dropout months for those 5 years.  This means you won’t be able to drop out as many other low contribution months.  The result is that your average CPP contribution amount could be lowered if you delay taking CPP until you’re 65.  This “penalty” ranges from nothing to an upper limit, depending on your work history.  In my analyses here, I do calculations for both a penalty of zero and the maximum penalty.  This allows the reader to see the full range of possibilities.

If you delay CPP until you’re 70, there is an additional dropout provision that lets you not count the months from age 65 to 70.  So, the dropout penalty doesn’t grow any further as you delay CPP past 65.

Constant Dollars

For the remainder of this article, I will be using constant dollars, which means all dollar amounts are adjusted for price inflation.  So, if you’re 60, and start CPP now, you’d get $640 per month in constant dollars for the rest of your life (based on the earlier example).  

Delaying to 65, assuming you have no dropout penalty, would get you $1000 per month plus 5 years of the gap between price inflation and wage inflation, which works out to $1038 in constant dollars.  Delaying to 70, again assuming you have no dropout penalty, would get you $1420 per month plus 10 years of the gap between price inflation and wage inflation, which works out to $1530 in constant dollars.

A side effect of working with constant dollars is that when we calculate the return from delaying CPP, this is a “real return,” which means the return over and above inflation.  An investment that earns a 5% real return when inflation is 3% has a nominal return of (1.05)(1.03)-1=8.15%.

Discrete versus Continuous

There are a number of ways that your CPP benefits change over time in discrete jumps rather than changing smoothly.  CPP benefits are adjusted for price inflation once each January, and the average industrial wage that is used to calculate your starting CPP level changes once per year.  As you delay CPP longer, the number of contribution months you can drop out grows, but it’s always a whole number.  In the case of OAS, payments rise with price inflation each quarter.

I’ve smoothed out all these calculations for the purposes of the analyses here.  These discrete jumps make little difference and serve mainly as a distraction.  So, if you calculate the perfect month to start CPP based on these smoothed calculations, you might be slightly better off a few months earlier or later.

A One-Month Delay Example

Suppose you’re deciding whether to take CPP at age 60 or wait one more month.  You’d be choosing between taking $640 per month now, or waiting a month to get more.  For the one month delay, the CPP rules say you’d get an additional 0.6%.  But this is 0.6% of the amount for CPP at 65, or $1000.  So, you’d get $6 more.

You’d also get more because of the excess wage inflation over price inflation.  Your CPP benefit (in constant dollars) for delaying one month works out to $646.40.

In deciding between $640 per month now or a delayed $646.40, the difference is one payment of $640 now versus an extra $6.40 per month for the rest of your life.  Note that this is a full 1% increase instead of the apparent 0.6% increase laid out in the CPP rules.  This effect makes delaying CPP more valuable in your early 60s than it is later on, even though the percentage increase in the CPP rules goes up to 0.7% per month after age 65.

Planning Age

How valuable this 1% increase in CPP is depends on how long you’ll live.  You might be tempted to guess your likely longevity, but this isn’t the same as choosing a sensible planning age.  According to the 2022 FP Standards Council’s Projection Assumption Guidelines, because I’ve already made it to my current age, there is a 50% chance I’ll make it to 89.  However, I don’t want to use a planning age of only 89 because I might live longer.  I don’t want to spend down all my assets by my 89th birthday because I might find myself still breathing after I blow out the candles.  So, I use 100 as my planning age.

As I get into more detailed analysis, I’ll start with a planning age of 100.  Later on I’ll give data on planning ages of 90 and 80.  For now, with a planning age of 100, delaying CPP by one month from age 60 works out to an annual real return of 12.6%.  This is an impressive return that is even better when we consider that it is a real return in excess of inflation.

All the One-Month Delays

We can think of the decision of when to start CPP as a sequence of up to 120 decisions of whether to delay just one more month.  The following chart shows the real return of each of these choices.  For the years from age 60 to 65, it shows this return for both the cases where you have no dropout penalty and where you have the maximum dropout penalty.  Individual results will be between these two values.

We see that this real return from delaying CPP by one month starts high and declines.  There is a bump up at age 65 when the CPP increase changes from 0.6% to 0.7% per month, but it declines again after that.

An investor hoping to earn 6% real returns and who has the maximum dropout penalty might be tempted to take CPP at 63 and a half.  However, this investor would then lose out on the great years from 65 to 69.  In fact, the average real return from age 62.5 to 67.5 is about 7%.  Unfortunately, we can’t take CPP at age 63.5 and then stop again at age 65.  We only get to pull the trigger once.

So, this chart doesn’t tell a complete story.  It gives the return from each one month delay, but sometimes, committing to a longer delay, such as from 62.5 to 67.5, gives better results.

The Best Delay

Instead of looking only at one-month delays, it’s better to consider all possible lengths of future delays and pick the best one.  So, for each month, I calculated the return for every possible future delay and chose the best one.  This gives the following chart, once again with a planning age of 100.

We see now that even for those with the maximum dropout penalty, there is always a delay with a real return of at least 7% all the way to almost age 68.  Anyone who thinks they can do better on their portfolios than a 7% real return has little reason to worry about amounts as small as CPP benefits.  

The 2022 FP Standards Council’s Projection Assumption Guidelines for a balanced portfolio are for about a 3% real return, and that is before deducting investment fees.  The worst case real return in the chart is 5.5% in the last month before age 70.  It’s clear that it’s not reasonable to count on a higher investment return than you can get by delaying CPP to age 70 if your retirement planning age is 100.

Planning to 90

Those with slightly weaker than normal health or who are wealthy enough that they’ll never spend all their money might choose a retirement planning age of 90.  The next chart is the same as the previous one except for the changed planning age.

We see that the real returns from delaying CPP remain very high in your early 60s.  Those who plan to make a 5% return on their investments might choose to take CPP at 68, but it’s difficult to give up a certain return in the 3% to 5% range in the hope of a better return that might not happen.

Planning to 80

Now we’re getting into the range for people with significantly compromised health.  You may have heard of an average life expectancy of around 80, but that tends to be old information, and it’s life expectancy from birth.  If you’ve already made it to age 60 today, you’re likely to make it to close to 90.

Unfortunately, some people have poor health and they’re so sure they won’t make it to 80 that they’re willing to spend down all their assets before they reach 80.  Here’s a chart for a retirement planning age of 80.

For someone expecting real returns on their investments in the 3% range, it makes sense to take CPP somewhere between age 62.5 and 65.5, depending on how much of a dropout penalty they have.  Delaying past age 67 makes no sense.

For those whose retirement planning age is well below 80 because of very poor health, it makes sense to take CPP at 60.

Delaying OAS

Unlike CPP, the earliest you can start collecting OAS is age 65.  You can delay OAS by up to 5 years for an increase of 0.6% for each month of delay.  So, the maximum increase is 36% if you take OAS at 70.

OAS payments are indexed to price inflation, and the increases before you start collecting are also indexed to price inflation.  So, OAS doesn’t have the wage inflation complications we saw with CPP.

In many ways, the OAS rules are much simpler than they are for CPP, but one thing is more complex: the OAS clawback.  For those retirees fortunate enough to have high incomes, OAS is clawed back at the rate of 15% of income over a certain threshold.  This complicates the decision of when to take OAS, and is outside the scope of my analysis here.

The following chart shows the real return of delaying OAS each month for a range of retirement planning ages, based on the assumption that the OAS clawback doesn’t apply.

We see that the case for delaying OAS isn’t nearly as compelling as it is for delaying CPP.  However, those with a retirement planning age of 100 get real returns above 3.4% for delaying all the way to age 70.  I plan to wait until I’m 70 to take OAS.

For a retirement planning age of 90, delaying OAS to 67 or 68 makes sense.  However, those whose health is poor enough that they plan to age 80 or less should just take OAS at 65.


Those who advocate taking CPP at 60 to invest and beat the returns from delaying CPP are at best misguided.  The returns from the first couple of years of CPP delay are eye-popping.  Depending on your retirement planning age and your expected investment returns, you may not choose to delay CPP all the way to age 70, but there is a strong case for doing so if your health is at least average.  The case for delaying OAS is weaker than it is for CPP, but it’s still strong enough that I’ll delay OAS until I’m 70.

Friday, May 20, 2022

Short Takes: Sustainable Investing, Mental Scripts to Calm Investors, and more

The list of needed repairs around my house that are beyond my skill to do myself keeps getting longer.  However, I’ve been promised that a contractor will be coming to complete one of them next week, and I managed to do a very poor concrete repair myself that might hold for a year.  I’m still riding high on last fall’s pool repair that I waited 3 years for.  So, it’s not all bad.  I’ll be happier when talented tradespeople aren’t all pulled into the vortex of building new houses.

Here are my posts for the past two weeks:

Money Like You Mean It


Rich Girl, Broke Girl

Interest on a Car Lease

Here are some short takes and some weekend reading:

Christiaan Hetzner reports that Standard & Poor’s sustainability index now includes Exxonmobil and excludes Tesla.  I know Tesla’s price is sky-high and Elon Musk is a weird guy who sometimes writes dumb stuff on Twitter, but how is this relevant?  This is a huge black eye for sustainable investing.  The criteria they use are clearly nonsensical.  If I ever decide to embrace sustainable investing, I’ll have to build my own index of sustainable companies.

Preet Banerjee offers some mental scripts to help control your emotions when investing.

Justin Bender says the passive versus active investing debate is dead.  When it comes to stocks this debate should be dead.

Thursday, May 19, 2022

Interest on a Car Lease

I’ve written before on how to calculate payments on a car lease.  However, when I began reading Jorge Diaz’s book Car Leasing Done Right, I saw that he believes the interest calculation is different from what I’ve seen everywhere else.

Update 2022-05-19: Jorge Diaz confirmed that his interest calculation was wrong and that he intends to fix it in the next version of his book.

Diaz gives the following example:

MSRP $27,799 + PDI $1825 = Vehicle cost of $29,624
Term: 48 months
Residual Value: $14,561
Interest Rate: 3.99%
HST: 13%

Diaz calculates the total interest paid over the 4-year lease to be $1217.01.  This figure is consistent with taking the difference between vehicle cost and the residual value and calculating interest on this as it declines to zero.  We can estimate this by starting with cost minus residual ($29,624 - $14,561 = $15,603).  The average balance owing will be about half of this.  Then we multiply by 4 years and 3.99% to get $1202.  This is just an estimate, but it comes fairly close to Diaz’s figure.

However, everywhere else I’ve looked says the interest owing on a lease is calculated on the full vehicle cost as it declines down to the residual value.  Estimating once again, the average amount owing would be ($29,624 + $14,561)/2.  After multiplying this by 4 years and 3.99% interest, we get $3526.

Diaz says he got his figure from the “Hyundai Canada Build Tool.”  However, when I looked at this tool, it didn’t give the residual value or the total interest paid, so I couldn’t learn much from it.  But I went to the Canadian Automobile Protection Association (APA) to use their lease calculator.  The result was that the pre-tax interest was $3521.16, which is close to my estimate and way off Diaz’s figure.  Further, the APA lease calculator gave after-tax lease monthly payments of $437.50, but Diaz says it is $377.84.

My conclusion is that lease interest is calculated on the entire vehicle cost as it declines down to the residual value, rather than on just the difference between vehicle cost and residual value as this figure declines to zero.

Monday, May 16, 2022

Rich Girl, Broke Girl

Kelley Keehn’s recent book Rich Girl, Broke Girl uses interesting fictional stories about women to teach personal financial lessons.  Keehn understands the circumstances, pressures, and emotions that drive women to make poor financial choices.  The advice in this book is packaged in a way that makes it an easier read for those who’d rather focus on life than money.

Keehn uses the stories of ten women to illustrate different types of financial mistakes and how to fix them.  Each chapter begins with the history of a woman whose financial life isn’t going well.  It then moves on to what she did wrong, some financial lessons, and how she can fix her troubles.  The chapters end with an update on how the woman is doing now that she has made some positive changes.  The anticipation of getting back to the story made it much easier to read the ‘lesson’ part of each chapter.

The most interesting lesson to me was about the woman who let a casual partner move in and stay longer than she wanted.  Although she never intended for this to be a long-term relationship, they lived together long enough to be considered common-law partners.  She ended up losing half of her assets.  

More interesting advice for those who have trouble controlling their spending is to find some frugal friends.  It’s better to have peer pressure pushing you in the right direction rather than the wrong direction.

In a chapter discussing investing, Keehn offers asset location advice to readers wealthy enough that their RRSPs and TFSAs are full, and the overflow is in non-registered investments.  She says to put stocks in non-registered accounts and bonds in the registered accounts.  However, this is the least tax-efficient approach.  It appears optimal if you trick yourself into taking more risk by setting an asset allocation that ignores taxes.  See Asset Allocation: Should You Account for Taxes? for a full explanation.

Another chapter tells a story about Katie who focused on paying off her mortgage by the time she was 55 but had no investments.  The lesson here was that Katie should have invested for a higher return than she got from her mortgage payments.  If we consider extra mortgage payments to be a form of saving, I think Katie’s mistake was that she saved too little.  If she only directed savings to her mortgage, it should have been paid off sooner, giving her more time to build investments.  I agree that a balanced approach of paying off a mortgage and building investments at the same time is a good idea.  However, focusing on just one or the other can be reasonable, as long as the total amount saved is adequate.

Although the cases where I mildly disagreed with Keehn are over-represented in this review, the book is filled with excellent advice.  I read books like this to better understand why people manage their money poorly and how to help them.  It’s clear that Keehn is an expert in this area.

In conclusion, this book is a strong attempt at a difficult problem: engaging people (women in this case) in personal finance lessons.  Readers may see themselves in some of the stories and follow some of Keehn’s good advice.

Thursday, May 12, 2022


For fans of indexing and business stories, Robin Wigglesworth’s book Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever is a page-turner.  Although this book is well-researched, it’s not a dry academic work.  Wigglesworth delves into the personalities of the important players who grew index investing to what it is today.

The stories begin with pioneers who sought to bring scientific rigour to investing rather than just rely on the instincts of investment managers.  These builders of index funds faced initial investor indifference as well as scorn from the traditional investment industry.  Index funds were even labeled as “un-American.”

Throughout the birth and growth of indexing, fund managers became increasingly aware of the threat to their incomes.  In 1973, “one anonymous mutual fund manager griped to the Wall Street Journal” that “a lot of $80,000-a-year portfolio managers and analysts will be replaced by $16,000-a-year computer clerks.”  Adjusting for inflation, that’s about $500,000-a-year for fund managers and $100,000-a-year for computer clerks.

Part of the impetus for index funds came from academic work including collecting data on stock returns, demonstrating the random nature of stock movements, and the Capital Asset Pricing Model (CAPM).  Much of this work assumed that stock prices followed the standard bell curve.  However, Benoit Mandelbrot had a “hypothesis that stock returns conform to ‘non-normal’ distributions,” and Eugene Fama proved this in “nauseating detail” in his PhD thesis.  It’s surprising that even today much of the investment industry ignores the reality that stock returns have “fat tails.”

A driving force behind the lowering of investment fees has been a “radical” idea of Jack Bogle’s: “mutualization.”  This is where a fund management company becomes “a subsidiary of the funds that would operate ‘at cost.’”  This solves the problem “that investment companies serve two often conflicting masters, the owners of the money manager, and the clients.”

It’s easy to get lost in the huge dollar figures involved in investing.  We often see millions, billions, and trillions.  The author makes a mistake along these lines with computer memory sizes when discussing the impact computers had on the development of indexing.  “In August 1981, IBM launched its first-ever personal computer.”  It was “puny by modern standards—an iPhone boasts about 250 times its 16K processing memory.”  The correct figure is more like 250,000 rather than 250.

In the story of the first Exchange-Traded Funds (ETFs), we learn about “a bunch of plucky Canadians stealing ahead of Team America to launch the first-ever ETF.”  The author is then quick to offer a series of excuses.  “They managed to do so mainly because of the smaller, less aggressively competitive Canadian finance industry” and “the more amenable local regulator.”  “The attempt was sponsored by the Toronto Stock Exchange, and leaned heavily on the Amex” and “State Street Spider team’s frustrating but pioneering work.”  Indeed, “the US exchange was happy to advise the TSE team on the details.”  The first ETF “tracked only the thirty-five biggest stocks in Canada—far easier than the entire S&P 500.”  “Moreover, the Canadian ETF was only a modest success.”  For the ETF revolution “to really take off it still needed a successful birth in the United States.”  Got it.  Canada was first but it doesn’t count because we had an easier job, stole the idea, got help from Americans, and did it poorly anyway.

As indexing has grown, some now claim that indexing is the cause of many ill effects.  “It is tempting to dismiss many of these concerns as the shrill self-serving scaremongering of industry incumbents coming under intensifying pressure from a cheaper, better rival.”  This is true of most complaints about indexing, but we can’t deny that indexing has some unintended side effects.  In one case, “a Chinese state-controlled maker of video surveillance cameras that had recently been put on a US government blacklist that prevents American companies from doing business with it, was added to MSCI’s flagship index.”  “Republican senator Marco Rubio blasted the decision, arguing that it would cause billions of dollars of US savings to automatically slosh into Chinese companies of dubious quality, and in some cases work directly against American interests.”

For anyone who enjoys business stories and is a fan of index investing, Trillions is an interesting read.  Wigglesworth does an excellent job of bringing the business and personal stories of the major players in the growth of indexing to life.

Monday, May 9, 2022

Money Like You Mean It

The world has changed over the past 30 years or so, and the advice baby boomers give their adult children isn’t always relevant in today’s world.  Money reporter Erica Alini offers a millennial’s view in her book Money Like You Mean It: Personal Finance Tactics for the Real World.  She delivers on her promise to offer useful financial advice for the world that millennial’s live in, and her writing style makes the book easy to read.

Millennial Challenges

Alini devotes a significant chunk of the book to the challenges millennials and women face.  She covers the familiar themes of high housing prices and student debt.  She also covers an under-appreciated problem that millennials face more than boomers did: “easy access to credit” and aggressive marketing to get people to use that credit.  Borrowing for any aspect of your lifestyle has been normalized.  Thirty years ago, people who never ate out and had no car weren’t seen as freaks.  Marketing has ramped up modern lifestyle expectations.

I’m of two minds about telling readers that the problems they face aren’t their fault.  It’s good when a reader’s reaction is to say ‘having financial troubles doesn’t mean there’s something wrong with me; I can work toward a better life despite the challenges.’  But it’s bad if a reader’s reaction is ‘there’s no point in trying because the game is rigged against me.’

Much writing I see about the challenges millennials face is just pandering: telling people what they want to hear gets clicks.  I find Alini’s writing much more thoughtful than this.  She acknowledges that boomers faced their own challenges when they were young: “This isn’t to say that everything was better in the past.  Far from it.”  Her point “isn’t about ditching individual responsibility and blaming the system for all your financial woes.  Instead, it’s about letting go of the shame and self-blame and using specific psychological techniques to make it easier to change your behaviour and get on the right track.”

The only point where Alini crossed over into pandering was when she suggests that it’s a man’s responsibility to “act like the capable human being he is by owning several household and child care tasks.”

Personal Finance Tactics

Alini covers a wide range of personal finance tactics, starting with a money bucket system for handling fixed expenses, variable spending, emergencies, short-term saving, and long-term saving.  Among the many other tactics, I’ll just mention some points that caught my attention.

“If you take a close look at your spending patterns, you’ll find a number of regular bills that don’t quite fit the definition of necessary expenses.  And I’m willing to bet a lot of them are subscriptions.”  “Research suggests we tend to dramatically underestimate just how big a chunk of our budget goes to subscriptions.”  “Too many routine costs — small as they may be — will do you in.”

Alini explains that Canadian student loans come with features that can give you repayment assistance or even loan forgiveness.  So, if you’re struggling with debt, you might want to focus on paying off other types of debt first.

“Beware of steep penalties for breaking fixed-rate mortgages” with the big banks.  Alini explains how the banks tinker with posted rates to pump up mortgage-breaking penalties.  These penalties can get so large that even if you think the likelihood that you’ll break your mortgage is low, you may not want to take the chance.

Estimates of house maintenance costs as a percentage of house price aren’t very useful.  “A more useful starting point is calculating $1 per square foot” per year.  I think this is too low.  For a 2500 square foot house, that’s $50,000 in 20 years.  In that time, you’ll replace the roof for about $10,000, and you’ll replace your furnace, air conditioner, and most appliances at least once.  You’ll replace windows, carpets, and maybe hardwood flooring.  In 20 years, you might have to repair a foundation crack, or pay to have animals removed from your attic.  We’re past $50,000 now and we haven't gotten to the long list of less expensive costs.  I come in closer to $2 per square foot per year.

“There is no financial wizardry that will somehow bring housing within reach where prices and rents have ballooned.  But what you can do in this unreal real estate market is stay cool, analyze your options, and choose the one that will benefit you the most in the long term.”

In the past, “bringing home a decent paycheque wasn’t nearly as straightforward as it’s often made out to be around the dinner table at family gatherings.”  In the 1970s there was “stagflation — a dreadful combo of high unemployment and rising prices.”  The early 1980s saw “an ugly economic downturn that would drag on for years.”

We hear a lot about the merits of “side hustles”.  “Let’s be clear about what side-hustling really is: working more than a full-time job.  That comes at a cost.”  The best use of a side hustle is “to eventually switch to a higher-paying or more fulfilling daytime job.”  Testing out a potential new career as a side hustle while working full-time at another job is a lot of work, but it’s less risky than quitting your job and trying to jump into a new career.

“Increasingly, retirement is more of a slow and gradual downshifting from working all the time to working less.”  I like this idea, but it doesn’t work for all types of jobs.  In high tech, telling your boss who is working 7 days a week that you want to drop to three days a week won’t go well.  You might as well say “I’m no longer committed to this company.”  Only a few highly-regarded high tech employees can get away with tapering down their hours.

“Many boomers are opting for semi-retirement, often striking out as independent professionals after a lifetime in the office  — not because they need the money, but because they like working on their own terms.”  I often meet people who are retired from their “regular” jobs, but are working at something else.  They almost always say they don’t need the money.  But in those cases where I get to ask open-ended questions and listen long enough, they almost always get to a point where they say they need the money.

Alini quotes Ilana Schonwetter, an investment adviser, who says women get lower returns on their savings because they’re less willing to take investment risk.  However, the famous Barber and Odean studies found that women get better returns than men do.  So which is it?  I’m not sure.

“If you’re in a couple that could end up with nest-egg inequality, consider spousal RRSP contributions or beefed-up transfers to the TFSA of the lower-earning partner to reduce the disparity.”  My wife and I go further.  We keep our accounts strictly separate and only spend the income of whoever has the larger amount saved.  Practically-speaking for us, that meant spending only my income for decades.  If CRA decides to audit us, we can show that all of my wife’s savings came from just her income.

“Seeing the value of my hard-earned savings drop bothered me more than I thought it would.  Clearly, I overestimated my risk tolerance.  I didn’t do anything then and there, but when the market had recovered and all was well again, I trimmed my allocation to stocks.”  That’s a very sensible reaction.  To sell while stocks are down is to get into a buy high and sell low cycle.

A bank of mom and dad trap: “Deep-pocketed parents help their kids get into a lovely home that is far too expensive for them.”  “Don’t let a generous gift leave you house-poor.”

“It sometimes feels so hard to achieve financial goals that our parents’ generation largely took for granted.”  A subset of boomers may have taken certain financial goals for granted, but some boomers never achieved goals such as owning a home.  Millennials who grew up in well-to-do suburbs would have seen mostly successful boomers.  Other boomers lived in places that weren’t so nice.


Alini achieves her goal of offering personal finance tactics for the real world.  Rather than give a thorough treatment of each topic with all details, she focuses on advice for starting out in each aspect of personal finance in the correct direction.  This allows her to cover a broad range of topics.  Millennial readers will benefit from this book, and will need other resources to dig into the details.

Friday, May 6, 2022

Short Takes: Forecaster Intervention, the Unexpected, and more

My wife pointed out that some readers of my post on the rout in long-term bonds may not know what “long-term bond” means.  Typically, bonds pay interest for some number of years after which you get the money you invested back.  So, a $10,000 30-year bond would pay interest on the $10,000 for 30 years, and then the investor would get the $10,000 back at “maturity”.  I think of any bond whose maturity is more than 10 years away as a long-term bond, but others may have different cut-offs.

Here are my posts for the past two weeks:

The Rule of 30

The Rout in Long-Term Bonds

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand has an intervention for stock market forecasters.

Morgan Housel
explains that every year, something big and unexpected happens.  Housel is always clever, but I find his essays rarely actionable, at least for an index investor like me.  This article, however, is actionable.  We need more ready cash and other savings than we can justify based on our predictions of the future, because bad things will happen that we couldn’t predict.

Big Cajun Man explains how the RDSP rules change when the beneficiary turns 18.  He also has advice on getting school fees treated as a medical expense.

Thursday, May 5, 2022

The Rout in Long-Term Bonds

The total return on Vanguard’s Canadian Long-Term Bond Index ETF (VLB) since 2020 October 27 is a painful loss of 24%.  Why did I choose that particular date to report this loss?  That’s when I wrote the article Owning Today’s Long-Term Bonds is Crazy.

Did I know that the Canadian Long-Term bonds returns would be this bad over the past 18 months?

No, I didn’t.  But I did know that returns were likely to be poor over the full duration of the bonds.  Either interest rates were going to rise and long-term bonds would be clobbered (as they have been), or interest rates were going to stay low and give rock-bottom yields for many years.  Either way, starting from a year and a half ago, long-term bond returns were destined to be poor.

Does this mean we should all pile into stocks?

No.  If you own bonds to blunt the volatility of stocks, you can choose short-term bonds or even high-interest savings accounts.  This is what I did back when interest rates became low.

Does that mean everyone should get out of long-term bonds?

It’s too late to avoid the pain long-term bondholders have already experienced.  I’m still choosing to avoid long-term bonds in case interest rates rise more, but the yield to maturity is now high enough that owning long-term bonds isn’t crazy.

Isn’t switching back and forth between long and short bonds just a form of active management?

Perhaps.  But it’s important to understand that bonds and stocks are very different.  Stock returns are wild and impossible to predict accurately.  There is no evidence that anyone can reliably time the stock market.  However, when you hold a (government) bond to maturity, you know exactly what you will get (in nominal terms).  When a long-term bond offers a yield well below any reasonable guess of future inflation, buying it is just locking in a near-certain loss of buying power for a long time.

Are investors safe if they own a bond fund with a mix of maturities?

Bond funds with a mix of maturities certainly mask what is going on, but that doesn’t save investors.  Eighteen months ago, the long term bond portion of aggregate bond funds were destined to perform terribly.  It was predictable that short-term bond funds would perform better than aggregate bond funds.  The fact that all this was largely invisible to bond fund holders didn’t change the fact that the long-term bonds in their aggregate bond funds got hammered.  Over 18 months, Vanguard’s aggregate bond ETF lost 13%, while the short-term bond ETF lost only 5%.

Will it ever make sense to own long-term bonds?

If Real-Return Bonds (RRBs) ever offer high enough returns above inflation again, I would certainly consider buying some.  The idea of getting a non-trivial return along with inflation protection is very appealing.


It pays to think about what you’re owning when it comes to bonds.  You can’t learn anything useful by just staring at the price movements of your bond ETFs.  Long-term bonds become dangerous after their prices rise to the point where yields looking forward become very small.