From The Desk of Brian Walker: The Hardest Part of Retirement

rrsp-eggThe moment you retire you are expected never work again.

Think about that for a minute. Every dollar you’ve ever EARNED has been EARNT. Your bank accounts will never be replenished again from your toil. All of your income from here on will be the result of your Canada Pension and OAS, any private pensions you are a part of and your savings. This is your life and your future boiled down to a number.

And as most companies stopped defined benefit pensions, many Canadians have had to turn (usually out of necessity) to investing in the market to grow and fund their retirement.

I have yet to retire, although I admit to being closer to it now than I was 20 years ago when I started this business, and I have to acknowledge that I find the prospect of retiring frightening. Work has occupied most of my life, and while I enjoy travelling and have a number of hobbies I have developed over the years I wonder if they can fill my days. But the thing that always sits at the back of my mind is about the money.

Because regardless of how well you have done in life there is always the potential to lose money in the markets, but so long as you are working you can replenish some of those losses. Once you have retired however, that’s all there is. A financial loss can be permanent in retirement and its impact will last the rest of you life, defining all your future decisions.

photoFor my currently retired and retiring clients the thing that has surprised me the most is that while these concerns are very present, they sit alongside a concern that should really be receding: market growth. For all the worry about protecting their retirement nest egg from severe downturns and unforeseen financial disasters, many investors are still thinking like they are accumulating wealth and have twenty years until they retire.

When it comes to investing, retirees need to be looking at investments that fit the bill of dependability and repeatability. Dividend paying stocks, balanced income funds and certain guaranteed products offer exactly that type of solution, kicking out regular, consistent income that you can rely on regardless of the market conditions. And as more and more Canadians head towards retirement we are seeing a growing base of useful products that fit these needs beyond the limited yield of GICs and Annuities.

The downside of these products is that they are all but certain to be constrained when it comes to growth. They simply will never grow at the rates of some companies, certain investments or aggressive markets by design. That’s a good thing, but nearly a quarter of a century of investing have instilled in many Canadians a Pavlovian response to the idea that investing must equal growth. But investors will be much better served by looking past desire for an ever expanding portfolio and towards investments that secure their long term income.

I’m not suggesting that once you retire you stop participating in the market, or that having any growth in your portfolio is wrong, or that it represents some kind of fault in your retirement planning. What is at stake though is controlling and protecting your savings and lifestyle by making your investment portfolio subservient to those needs over growth focused market participation. Your retirement could last almost as long as your entire working life, and easily as long as the amount of time you saved for your retirement. There will be plenty of things to worry about in retirement, and lots of other financial needs that must be addressed; from comprehensive estate planning to out-of-pocket health care costs. Why complicate your retirement needs by worrying about whether your are participating fully in bull markets, or worse, bear markets?

 

If you would like to discuss how we can help your retirement needs, or how we can re-tune an account for retirement please send us a note!

Why Malcolm Gladwell and TED Talks are a Terrible Way to Understand the Economy

The last few years have seen a slew of books that explore ideas about how nature governs far more of our lives than we might care to admit. Books like Stumbling On Happiness by Dan Gilbert and The Righteous Mind by Jonathon Haidt both explore the way that the subconscious mind governs many aspects of our lives. Meanwhile a number of other books like Malcom Gladwell’s Blink and Steven Levvitt and Stehpen Dubner’s book Freakonomics are working to explain the secret rules of economics in our lives. Book’s like this tend to distill highly complicated ideas down to bite sized stories, simplifying complex data into snippets of wit and good storytelling and removing the scientific uncertainty that may accompany many of the findings the books claim to show.

What’s far more interesting is how useless much of this data is. Take for instance this video from Vox.com about the statistical benefits of being good looking.

While much of the data seems interesting it isn’t exactly helpful, especially when we consider that this is in aggregate and doesn’t likely reflect your reality.

In fact many of these theories don’t reflect reality the way they hope. Freakonomics co-author and economist Steven D. Levitt found this out when they attempted to bribe students to improve their grades. While they did get some positive results, the reality was it was far from a resounding success. Even with an opportunity to earn $200 a week if the children continued to improve their grades many simply didn’t take the opportunity.

You may have never heard of Hernando DeSoto, but the Peruvian economist is sought after around the world for his insights about poverty and property rights. His book (which I love) outlines some of the most convincing connections between lack of property and the ability to improve one’s standard of living. His argument was that if squatters were given ownership over their home they would have collateral to borrow against and could start or improve their businesses. However, when in 2004 the World Bank carried out a program in Peru to test DeSoto’s theory that land titles would lead to more lending by banks. In actuality it failed in its entirety, with bankers unwilling to lend against the only asset of an impoverished family.

An actual simple truth is that life is unbelievably complicated and its hard to understand and know what governs many of the elements of our lives. Whether the question is nature of nurture, economics or social sciences in the end we seem to know very little about what drives some of the biggest events in our lives. In spite of the number of times these theories prove to be wrong, our media has come to speak more and more in absolutes. It is getting to be so that you can’t get on television or in government unless you claim to know all the answers without doubt.

Meanwhile there seems to be an actual deficit in useful information that the media ignores. For instance, a more intriguing statistic is that in a recent poll by Gallup, less than 25% of Americans were able to correctly identify what has been the most successful type of investment (You can do the quiz here). Over a third of Americans haven’t taken any steps towards planning their retirement and I’m sure that number is similar for Canadians. There is a knowledge gap opening up, where knowledgable investors will be able to save on average 25% more than less prepared and less knowledgable people, a reality that could be addressed by the news, but is being perpetuated through bad journalism.

 

Looking for Dark Clouds Amidst Silver Linings

628x471This year got off to a rocky start. As of writing this post, the S&P 500 is down over -2% year-to-date (YTD), while other global markets have been similarly affected. The MSCI Global Index is down nearly -1%, the MSCI Emerging Markets index is also down -4.5%, as is the FTSE 100 (UK, -1.3%) and last year’s super-performer, Japan (-12.1%). This sudden “frothiness” has brought out the fear mongers and market doom-sayers. So regularly has the drum been beaten that 2014 should see a significant slide in market value that it has become a regular question in every meeting. (note: I did not update these numbers for the current week, however many of these returns have improved. In some cases quite dramatically)

The only problem is that any internet search will easily reveal market calls for a correction EACH and EVERY YEAR! This doesn’t mean that a correction won’t happen, in fact if there is one thing that we know about the markets its that corrections do, and must happen. We also know that the longer you go without a correction the closer you must be to having one. The problem is that we place value on people who claim to be able to predict a market downturn, even when we can’t actually predict when a downturn will actually occur. So the media keeps trotting out people willing to make outlandish market predictions knowing that it will grab headlines and eventually be right.

Except….

Except that there are lots of reasons to be cautious in the current market conditions. Not that we can predict when we might actually see a downturn, but there a lot of reasons why it makes sense to have defensive positions in your portfolio. For instance, we are currently at an all time high for IPOs, the most since 1997. There is some evidence that as IPOs peak its not uncommon to see a market correction, as less valuable companies try to cash in on market exuberance and professional investors try and sell their positions in less viable companies to bullish markets.

Other market metrics also seem to favour being on the defensive. Currently there are 84 companies on the S&P 500 with shares that are valued above 10x earnings. This means that investors are incredibly bullish about the future prospects when it comes to income growth. Many of these companies are in hi-tech sectors, like social media firms such as Twitter. For the record that is the most number of companies above this valuation since prior to the tech bubble in 1999.

Share buy backs also play a role here. If you aren’t familiar, with borrowing rates still very low many companies have taken the opportunity to borrow large sums of money and buy their outstanding shares back. Why? As the number of outstanding shares in the market declines the Earnings Per-Share goes up. This means that even if a company isn’t seeing actual growth in sales, it does mean that the the remaining shares receive a greater portion on the earnings, artificially increasing their value. In of itself this isn’t a problem, but it serves to increase the stock market while not seeing much in the way of actual economic growth.

Lastly we have also seen that the flow of money into ETF funds (passive investments that mimic indices) is also adding volatility to the markets. As investors remain concerned over negative surprises in the news, the high liquidity of ETFs causes even greater short term fluctuations in the markets as investors pull back. This is especially true in the Emerging Markets, and has had the unusual side effect of showing that actively managed funds have outperformed comparable ETFs.

In summary then there are four good reasons to believe that the markets may get more turbulent going forward. The lesson however is not to commit to a wholly negative or positive view of the markets, but rather continue to hold a diversified group of assets to deal with all market surprises, both good and bad!

 

Canadians Losing the Battle to Save For Retirement

Money WorriesPeople sometimes ask why I seem to be so focused on housing and its costs as a financial advisor, and I think the answer is best summed up declining rates of RRSP contributions. Currently many Canadians seem to be opting out of making a RRSP contribution this year, with both Scotiabank and BMO conducting separate and disheartening surveys about likely RRSP contribution rates. Unsurprisingly the answer most Canadians gave to why they would not be contributing this year was because they “did not have enough money.” These surveys also found that 53% of Canadians did not yet have a TFSA either for similar reasons. The expectation is that by 2018 Canadians will have over a trillion dollars of unused contribution room.

These kinds of surveys invariably lead to a kind of financial “tut-tutting” by investment gurus.

As one member of BMO’s executes put it, an “annual contribution of $2,000 to an RRSP… costs less than $6 per day.” which is true but does not really spell out a viable path to a retirement, merely the ability to make a contribution to a RRSP. While there is nothing wrong with the Gail Vaz-Oxlade’s of the world handing out financial advice and directing people to live debt free, Canadians simply do not live in some kind of financial vacuum where all choices boil down to the simple mantra of “can I afford this?” Frequently debts are incurred either because they must be (educational reasons, car troubles, etc.) or because it is not feasible to partake in an economic activity without taking on debt (like buying a house). Similarly it is not practical to assume that every decision be governed exclusively by a simple weighing of financial realities. It’s true it would cost less to live in Guelph, but many people do not wish to live in Guelph and would rather live in Toronto (Nothing personal Guelph!)

What we do have though is a precarious situation where the economy is weak (but maybe improving), which sets government policy through low interest rates. Low interest rates means borrowing for big ticket items like homes in places where supply is limited, like the GTA, or Vancouver or Calgary. This in turn keeps both house prices and debt levels high. It’s telling as well that a growing number of Canadians are beginning to look at their homes as a source of potential income in retirement. All of this seems to be happening while different financial “experts” argue whether the Canadian housing market is actually over valued, or not

This is where I get a chance to make a personal plug for the benefits of my role. While I don’t have much say in government policy, or even directing housing development in big cities, it is rewarding to know that financial advisors like me have a significant impact on the savings rates of those Canadians that work with us. A study called Value of Advice Report 2012 reported that Canadians that had a personal wealth advisor (that’s me) were twice as likely to save for retirement, and that the average net worth of households was significantly higher when they had regular financial advice from an advisor (again, me). The RRSP deadline this year is March 3, so please give me a call if you haven’t yet made your RRSP contribution. 

It’s Official, Young Canadians Need Financial Help

I thought I had more saved!It must be terribly frustrating to be a twenty-something today. It’s hard to find work; you probably still live with your parents and a whole culture has developed around criticizing your generation. But beyond the superficial criticisms directed at twenty somethings, there are structural shifts going on within the economy that are making paupers of the next generation.

Some of these shifts do extend from things like a lack of good paying jobs in manufacturing and an increasingly reliance on service sector jobs. There are many university graduates that now find themselves in work that they are overqualified for and underpaid in. But some of the changes also come from an increasingly high cost of living that is making it financially untenable to move out of a parents’ home. This phenomenon has been dubbed “boomerang kids”, or “boomerang generation.”

The challenge that the Millennial generation is facing is that costs are rising as a proportion of their income. Consider the cost of a house in Toronto. In November of this year the average cost of a home sold in Toronto was $538,881, up 11.3% from November of last year. Assume you make the minimum downpayment to get a home, 5%, your downpayment would then be $26,944 (roughly).  Your monthly payment on a 25 year fixed rate mortgage would be $3,077 per month, or close to $36,924 per year. If we factor in real-estate tax and an average heating cost, that would bring annual costs to roughly $43,000 a year. That would mean that to qualify for the mortgage with a bank you would need to be earning at least $134,375 before taxes. The average income in Canada is $47,000.

We can quibble about how accurate these numbers are, but it would still amount to the same end. It costs a lot today to be like your parents. Buying a house for the first time is incredibly expensive and forces young people to make different choices about how to spend their money. For many millennials this has meant “postponing” growing up, financially as well as spiritually. But what today’s young generation actually need is a working budget that lets them get a big picture of their spending and allows them to set and reach financial goals. There are free services, like Mint.com (which I am very much in favour of), but even better is that young people should be encouraged to seek out professional financial help. People with a small amount of savings often feel discouraged about seeing a professional, but getting this guidance early on can lead to significantly better financial outcomes, comfort with the markets and wiser tax efficient planning!

Want to discuss your future planning?

That Latte Makes You Look Poor – Great Advice for Young Investors

full-leaf-tea-latte

In the long fight to encourage people to save money, there is a theory that the money we fritter away on small treats is actually bankrupting us. Coined “The Latte Factor” by David Bach, a personal finance guru formerly a Morgan Stanley broker, it caught on like wildfire after he appeared on Oprah in 2004. Already the author of the popular book Smart Women Finish Rich, David’s idea was that the small expenditures on things like Starbucks lattes, the occasional lunch out and other “treats” that we give ourselves were bankrupting our future.

But the devil was in the details. According to author and former personal finance columnist Helaine Olen, David Bach’s latte factor wasn’t true:

 It didn’t work mathematically. It didn’t work in terms of what we were actually spending our money on. And it didn’t take into account what life costs were actually rising or falling.

– From Pound Foolish: Exposing the Dark Side of the Personal Finance Industry

As the reality often is with personal finance gurus, they need a hook, and Mr. Bach had a great one with the “Latte Factor” (a term he’d trademarked no less). But to make his numbers more impressive he would fudge them and round up, forget inflation and taxes and grant a very rosy investment picture so he could demonstrate his luxury cutting routine could equal millions of dollars saved.

But while Helaine Olen may have sussed out Bach’s faulty math, I don’t think the idea is a total waste.

Lots of 20 and 30 somethings struggle with saving. Retirement seems so far away as to be in another galaxy. Debt is normally quite high, either because of student loans or because of mortgages and new families. In other words lots of money is being funnelled into cost of living and debt repayment and little money finds its way into direct investments.

But lots of young people do drink lattes. And go out on the town. And eat out. In other words people between the age of 20 to 35 do have lots of money that is being spent on small luxuries. Getting a hold of those costs could easily lead to small, but incremental investments.

Now is the time to turn away from flash finance gurus like Mr. Bach and towards the steady hand of  David Chilton and his seminal book The Wealthy Barber. 25 years after it was first published it still has some of the best advice about saving that anyone can take. Pay yourself first! Set up an automatic withdrawal on your pay-days and put it into your RRSP or TFSA. You won’t notice its even gone, and you’ll thank yourself later.

Need help getting control of those little luxuries? Check out mint.com – a free site that can help you budget, or give us a call to discuss some easy ways to save.