If you buy an annuity for $100,000, and it pays $6000 per year, that seems like a 6% return. But that’s not actually the interest being paid. Most of each payment is just your own money returned to you. Here I try to work out what interest rate an annuity actually pays. To do this, I worked out what interest rate the insurance company would have to make to exactly cover all the payments to a large group of people who buy the same annuity. For that I needed actuarial tables that predict how many people will live to each age. I used data from Statistics Canada. Note that this is not the same as just using average life expectancy; I actually assume the insurance company keeps making payments to remaining survivors each year. There are many types of annuities. Here I focus on the simple case where there is no guarantee period, which means that the payments stop when you die, even if that happens shortly after buying the annuity. I also looked only at single person annuities wit...

In his upcoming book The One-Page Financial Plan , Financial Planner Carl Richards lays out his approach to helping clients with their finances. His methods are certainly far different from the mutual fund salespeople I’ve dealt with in the past. The book gives you a roadmap for figuring out what is truly important to you. The idea is this will put you more at ease with your finances and make future decisions more clear-cut. The book is very well written without much math, making it an easy read. For Canadian readers, this book contains a few references to 401(k)s (the U.S. version of a Canadian RRSP). Other than that, almost everything in the book applies well to investors in any country. Richards finds that most new clients expect to hear some sort of financial trick or a hot tip that will make them lots of money. Of course, that doesn’t exist and Richards goes through a set of steps that puts choosing investments last instead of first. His process begins with the simple ...

Here are my posts for this week: Going from BMO to Tangerine Chequing The Elephant in the Room with Annuities Here are some short takes and some weekend reading: Garth Turner wrote a very interesting piece explaining how important information for real estate buyers is readily accessible in the U.S. but not Canada. Tom Bradley at Steadyhand has some very sensible thoughts on debt and real estate. Boomer and Echo liken the new information Canadians will get from their financial advisors (called CRM2) to the Enlightenment centuries ago. This is a bold analogy, and I hope CRM2 proves to open Canadian investors’ eyes to the fees they pay. Big Cajun Man has some fun playing a variant of buzzword bingo he calls RRSP bingo. My Own Advisor recommends some books for newbie investors.

The idea behind annuities sounds great. You get a predictable income for the rest of your life no matter how long you live. This frees you from worries about how much you can safely spend each year. Rob Carrick’s recent article covered many important details concerning annuities. However, he left out a very important part of the discussion. The elephant in the room with annuities is inflation. Canadians like to complain that their CPP (Canada Pension Plan) and OAS (Old Age Security) payments are too small, but at least they are indexed to inflation. Imagine how small these payments would look if they never changed for 25 years. An ancestor of mine held a senior position and retired decades ago with what was considered to be a very generous pension. However, the payments weren’t indexed to inflation. By the time he died 23 years later, his monthly pension payments had dropped in value by nearly a factor of 3. Take your current income, divide it by 3, and imagine trying to ...

I’m not quick to make changes in my life. I’ve known for a while that I should move away from my BMO chequing account, but momentum has kept me there. But I finally opened a Tangerine chequing account. The process was less painful than I expected. ( Disclosure: Tangerine did not pay me to write this article. I made a choice based on my banking needs. However, I may benefit from this article as described in the final paragraph. ) I’m a happy customer of BMO InvestorLine. Among other great features, their non-registered accounts treat the cash holdings like a regular chequing account. You can get a debit card for it and make cash withdrawals from bank machines. I’ve run my personal transactions through such an account for years. However, they only give 2 free withdrawals per month. This limitation isn’t too bad for me because I don’t make many transactions. Until a little over a year ago, I paid 60 cents per excess withdrawal. Then it went up to a dollar. While at a cash...

After a draw that gave all entries an equal chance, the TurboTax giveaway winners are Michael H., Robert H., and Ali C. Congratulations! I have contacted all 3 winners. Thanks to everyone who entered the draw! I appreciated the kind messages many of you included with your entry. I wrote only one post this week about Warren Buffett’s thoughts on individual investors: How Warren Buffett Thinks You Should Invest Here are some short takes and some weekend reading: Malcolm Hamilton makes the case for leaving TFSAs alone. He thinks we shouldn’t double TFSA limits, and he thinks we shouldn’t cut TFSAs back. Robert McLister explains that your bank doesn’t necessarily have to lower your variable mortgage rate when the Bank of Canada lowers interest rates. Potato takes on a reader question about whether to index or invest in award-winning mutual funds. Boomer and Echo make the point that those who complain about low interest rates punishing savers need to properly account ...

Warren Buffett’s latest letter to Berkshire Hathaway shareholders contains a brilliant prescription for managing a personal portfolio. I was prepared to write a post quoting a few good lines from his letter, but his message on individual investing on pages 18 and 19 is so good that I will devote the rest of this article to summarizing it. The goal of investing is to increase the purchasing power of your savings. Over the past 50 years, S&P 500 stocks, with reinvested dividends, have increased in value by a factor of 113, while the U.S. dollar’s purchasing power has dropped by about a factor of 8. “The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency.” This was true in the previous 50 years and “it is almost certain to be repeated during the next ...