Short Takes: Bank Accounts in the U.S., Investing in Retirement, and more

After only 10 short weeks, I’ve managed to open a checking account at a U.S. bank and move some money into it.  Some of the delay was due to misunderstandings on my part about what steps I was supposed to take next, and some of it was due to weird restrictions on the type of account in Canada that can be used to transfer money out of the country.  Mostly, though, it was the fact that there are many steps and each one seems to take a few business days.

I doubt that the specific details of my experience matter much.  The main takeaway is that if you’re considering opening a bank account in the U.S., consider starting the process long before you need the account to be in place.

Here are my posts for the past two weeks:

Bad Retirement Spending Plans

My Answer to ‘Can You Help Me With My Investments?’

Here are some short takes and some weekend reading:

Robb Engen at Boomer and Echo describes a smart two-fund solution for investing in retirement.

Tom Bradley at Steadyhand explains the risks of owning liquid versions of illiquid investments.  This adds to what I’ve read about illiquid investments that convinces me to stay away.  Your mileage may vary.

My Answer to ‘Can You Help Me With My Investments?’

Occasionally, a friend or family member asks for help with their investments.  Whether or not I can help depends on many factors, and this article is my attempt to gather my thoughts for the common case where the person asking is dissatisfied with their bank or other seller of expensive mutual funds or segregated funds.  I’ve written this as though I’m speaking directly to someone who wants help, and I’ve added some details to an otherwise general discussion for concreteness.

Assessing the situation

I’ve taken a look at your portfolio.  You’ve got $600,000 invested, 60% in stocks, and 40% in bonds.  You pay $12,000 per year ($1000/month) in fees that were technically disclosed to you in some deliberately confusing documents, but you didn’t know that before I told you.  These fees are roughly half for the poor financial advice you’re getting, and half for running the poor mutual funds you own.

It’s pretty easy for a financial advisor to put your savings into some mutual funds, so the $500 per month you’re paying for financial advice should include some advice on life goals, taxes, insurance, and other financial areas, all specific to your particular circumstances.  Instead, when you talk to your advisor, he or she focuses on trying to get you to invest more money or tries to talk you out of withdrawing from your investments.

The mutual funds you own are called closet index funds.  An index is a list of all stocks or bonds in a given market.  An index fund is a fund that owns all the stocks or bonds in that index.  The advantage of index funds is that they don’t require any expensive professional management to choose stocks or bonds, so they can charge low fees.  Vanguard Canada has index funds that would cost you only $120 per month.  Your mutual funds are just pretending to be different from an index fund, but they charge you $500 per month to manage them on top of the other $500 per month for the poor financial advice you’re getting.

Other approaches

Before looking at whether I can help you with your investments, it’s worth looking at other options.  There are organizations that take their duty to their clients more seriously than the mutual fund sales team you have now.

One option is a professional advisor who invests client money in low cost funds.  Another option is a client-focused mutual fund company that charges lower fees and provides some good advice for their investors.  Either option would save you money and give you better financial advice than you’re getting now.  It takes some knowledge to be able to determine whether some other financial advisor is really offering one of these better options.  I can help with this if you like.

Can I help directly?

Maybe.  I’m only willing to completely take over investments for my closest family members, and even then only if I think leaving it all to me is what they really want.  I can set you on a good path, but you may not be able to stay on it, and I may tire of trying to explain why you shouldn’t stray from that path when you decide to sell everything, or buy cryptocurrencies, or whatever idea you’ve come up with.

In your case, the good path I’m talking about would be to invest money you won’t need in the next few years in Vanguard’s exchange-traded fund called VBAL.  VBAL owns substantially the same stocks and bonds you have in your current portfolio.  The difference is that you’ll pay about $880 per month less in fees.  After a decade, you’ll save more than $100,000.

So, if the market goes up 10% one year, you’ll end up with about $10,500 more than if you keep your investments where they are now.  And if the market goes down 10% in another year, you'll still end up with about $10,500 more that year than if you stay where you are now.  Either way, the outcome is better.

Risk

The biggest risk I see will come when the market falls substantially at some point in the future, and you’ll decide that I should have foreseen this event and warned you to sell.  Nobody can predict market crashes reliably.  The best plan is to maintain a sensible risk level in your portfolio and ride out market pain.  But that’s much easier said than done.

Many people have a hard time believing that stock market crashes are inevitable and unpredictable, and some financial advisors promise to help steer you around market declines.  They may or may not be aware that the managers of the funds they sell can’t avoid losses.  If you don’t learn that getting caught in a market crash and having to ride it out is an inevitable part of investing, you’re doomed to jumping from one expensive advisor to another every time stocks crash.

Conclusion

So, the short answer to the question of whether I can help you with your investments is that it depends on how easily you can be distracted from a simple and successful investing path and how much energy I have for talking you back to that path.

Short Takes: BMO InvestorLine HISA Interest, Ford Breaking a New Vehicle Contract, and more

I mentioned a month ago that I was trying out BMO InvestorLine’s high-interest savings accounts (HISAs) that are structured as mutual funds (BMT104, BMT109, and BMT114).  They pay exactly the advertised rate of 4.35%, but I couldn’t tell this from the confusing list of transactions.  Looking at the month-end balances, I was able to determine that they pay 1/365 of the annual interest each day, accumulating as simple interest over a month, and the accumulated interest is paid each month.  So, longer months pay more interest than shorter months, which is different from most other interest-bearing accounts I’ve had in my life.

My most recent post is:

Bad Retirement Spending Plans

Here are some short takes and some weekend reading:

John Robertson signed for a new Ford vehicle, and now Ford is demanding an extra $4000.

Nathan Proctor says companies are using legal tricks to get us to pay extra in the form of subscriptions for products we’ve already bought.  He’s fighting back with right-to-repair legislation.

John Oliver’s takedown of Jim Cramer is hilarious, but it’s important to remember that Cramer is random, not consistently wrong.  I’d be thrilled to bet against his picks if he were wrong most of the time, but the truth is that his picks turn out well sometimes.  He spouts off with confident takes on matters he knows nothing about.  No matter how well you think you understand a company, only high-level insiders have any useful knowledge about its near-term stock movements, and they’re not supposed to use this inside information.

Preet Banerjee explains the history and consequences of the repeated debt-ceiling crises in the U.S.

Salman Ahmed at Steadyhand explains how zero commission platforms make money off you.

John De Goey points out that certain subjects aren’t covered by media aimed at financial advisors.  These subjects include the fact that some financial advice is bad, and that the cost of investment products matters.  Sadly, know-nothing advisors are usually the ones investing their clients’ money in expensive closet index funds that masquerade as actively-managed mutual funds or segregated funds.

Bad Retirement Spending Plans

A recent research paper by Chen and Munnell from Boston College asks the important question “Do Retirees Want Constant, Increasing, or Decreasing Consumption?”.  The accepted wisdom until recently was that retirees naturally want to spend less as they age.  This new research challenges this conclusion.

What we all agree on is that the average retiree spends less each year (adjusted for inflation) over the course of retirement.  However, averages can hide a lot of information.  The debate is whether this decreasing spending is voluntary or not.  However, it’s important to recognize that the answer is different for each retiree.  Some don’t spend less over time, some spend less voluntarily, and some are forced to spend less as their savings dwindle.

I’ve been saying for some time that not all spending reductions by retirees are voluntary and that this affects the average spending levels across all retirees.  I’ve discussed this subject with many people, including a good discussion with Benjamin Felix, who was good enough to point me to the new Chen and Munnel research.  (Larry Swedroe also discussed this research.)

Research Findings

“On average, household consumption declines about 0.7-0.8 percent a year over retirement.  However, consumption for wealthy and healthy households is virtually flat, declining only 0.3 percent a year over their retirement.  Thus, at least in part, wealth and health constraints help explain the observed pattern of declining consumption.”

“Retirees likely prefer to enjoy constant consumption in retirement.  The results suggest that a retirement saving shortfall exists since consumption declines are larger for households without assets.”

Resistance

Some commentators want to believe that it is safe to assume declining spending in a retiree’s financial plan.  They dismiss involuntary reductions in observed retirement spending as insignificant.  However, this new research makes it clear that retirees’ preferred spending levels are much flatter than the observed spending data.  (For the record, Ben Felix says he assumes flat inflation-adjusted spending in his clients’ retirement plans.)

The idea that we’ll want to spend less as we age is seductive; it means we don’t have to save as much for retirement, can retire earlier, and can safely overspend in early retirement.  What’s not to like?  The problem is that average retirement spending data shows spending declines right from the first years of retirement.  Does it make sense that people still in their 60s suddenly want to just sit around inside their homes?  It’s plausible that retirees tend to become homebodies deep into their retirements, but not in the early years.

The clever-sounding justification for planning for spending declines is that our retirements consist of “go-go years, slow-go years, and no-go years.”  However, this contradicts the observed early spending declines.  In reality, some unfortunate retirees have not-enough-money-left years.

Other Factors to Consider

Another important consideration is that once retirees do start slowing down deep into their retirements, the possibility of needing expensive care increases.  It’s not clear that we can ever count on wanting to spend less during retirement.

Yet another factor is the tendency for wage inflation to exceed price inflation.  Over time, society becomes slowly wealthier.  If you plan for flat inflation-adjusted spending through retirement, your spending level will slowly fall behind your younger neighbours.  If you plan for declining inflation-adjusted spending, you’ll fall behind faster.

Conclusion

Average retiree spending declines over time in part because some retirees spend too much early on and are forced to cut back.  It doesn’t make sense to me to plan my own retirement using statistics that include data from retirees who have overspent.  The end result for me is that I’ll assume my spending desires will grow with inflation over my retirement.  Anything less is risky.

Short Takes: Too Many Accounts, the Advice Gap, and more

I prefer to have as few bank accounts and investment accounts as possible.  However, there are RRSPs, TFSAs, non-registered accounts, and Canadian and U.S. dollars that drive me to open ever more accounts.  The latest reason I had to open a new account seems the silliest to me.  I have a U.S. dollar chequing account as part of an InvestorLine account.  It behaves like any other BMO U.S. dollar chequing account except that I can’t do a global money transfer from it.  So, I had to open a “normal” U.S. chequing account at a BMO branch.  So, now when I want to send money to the U.S., I have to move money from InvestorLine to my new “regular” U.S. dollar chequing account, and then from there to the U.S.  When I opened this new account, the bank employee asked what name I’d like to give it.  I was tempted to say “stupid,” but I settled on “USD.”

Here are some short takes and some weekend reading:

Jason Pereira has a strong take on the supposed financial “advice gap” in Canada.

Justin Bender tries to talk us out of ditching all-equity ETFs VEQT and XEQT to invest directly in their underlying holdings.  He makes a compelling case.

Robb Engen at Boomer and Echo discusses the advantages and disadvantages of outsourcing things you don’t want to do for yourself, such as house cleaning.  Some call it lazy, but I think it can make sense to pay someone else to do something you don’t like doing.  The key is to consider all relevant factors.  If you hire a housekeeper, the obvious advantage is not having to clean your own house, and the obvious disadvantage is the cost.  The less obvious disadvantages are having to manage the housekeeper, possibly having to tidy up clutter to allow the housekeeper to work, and having to hide anything sensitive you wouldn’t want your housekeeper to see.  If all relevant considerations net out to a positive, then go for it.