All posts by Robb Engen

Worst day ever for stocks?

Will Monday February 5th go down as the worst day ever for stocks? On this day the Dow Jones industrial average lost more than 1,175 points:  the worst single-day point drop in its history. But was it really the worst day ever? Investors need some context.

The 1,175 point drop was indeed the biggest single-day point loss the Dow has ever sustained. But let’s remember the Dow has been soaring almost uninterrupted since March 2009 when it bottomed-out at 6,627 points during the global financial crisis. By the end of January 2018 it had reached a record 26,616 points.

Related: Have we reached peak stock market?

Better to forget about points and focus instead on percentage gains and losses. Taken in this context the headline reads a bit different. The Dow plunged 4.6 per cent: its worst day since August 2011. It doesn’t sound nearly as gloomy.

Another way to frame this day is that the stock market has erased its gains from the start of the year. But 2018 is just one month old.

Where does this day rank in terms of largest one-day percentage drops in history? Will it live on in infamy like Black Monday, Black Tuesday, the Flash Crash, or the aftermath of the September 11th attacks?

Nope, not even close.

If you were thinking Monday’s 4.6 percent drop was a bloodbath then how would you have reacted to one of the top 20 largest daily losses of all time? This wasn’t even a blip on the radar.

Related: What can you do about the upcoming stock market crash?

Continue Reading…

Using annuities to create your own personal Pension In Retirement

The reason why retirement planning is so difficult is because the one variable we need to know – how long we have to live – is impossible to predict. Sure, we have mortality tables and family history to help guide us, but statistically speaking, half the population will outlive their median life expectancy.

That makes longevity risk – the risk of running out of money before you die – a very real threat to your retirement. And yet many Canadians ignore this threat by not saving enough during their working years; retiring before they’re financially ready, taking Canada Pension Plan benefits too early, withdrawing too much from their RRSPs, and so on.

Nearly half of Canadians are worried they won’t have enough money to live a full lifestyle in retirement, according to a recent survey by RBC Insurance. They interviewed 1,000 Canadians aged 55 to 75 about their retirement readiness and came out with some interesting findings.

The retirees, or soon-to-be-retirees seem to want it all, according to the poll, yet many will lack the savings to do so:

  • 80 per cent want to live at home for as long as they can
  • 72 per cent said it’s important to own a car.
  • 68 per cent said it’s important for them to be able to travel at least once a year
  • 53 per cent want to go out for lunch or dinner a few times a week

Having enough money to support their desired lifestyle is a real concern, highlighted by the fact that 62 per cent of those surveyed are worried about outliving their retirement savings.

The one retirement income tool that didn’t appear on the radar was an annuity. Just 12 per cent said they are using or plan to use one in retirement.

How Annuities Can Help In Retirement

An annuity provides a predictable income stream for life – much like how a defined benefit pension, CPP, and OAS pays benefits for as long as you live. Nothing protects you from longevity risk quite like a guaranteed lifetime income.

It’s puzzling why more Canadians don’t choose to turn even a portion of their savings into an annuity – to pensionize their nest egg, to borrow a phrase coined by financial authors Moshe Milevsky and Alexandra Macqueen.

Lack of knowledge around annuities definitely plays a role. While nine in 10 Canadians polled by RBC know they don’t need to invest their entire retirement savings into an annuity, just 28 per cent know that an annuity doesn’t have to be managed once it has been purchased. Continue Reading…

10 financial lessons to share with friends

The personal finance community can be a bit of an echo chamber, reinforcing and repeating the same ideas on how to save, invest, and spend our money. This sort of tribalism can be intimidating for outsiders who are eager to learn but afraid to ask questions or know where to start, especially when it comes to more complicated topics.

The truth is not all Canadians are financially savvy. In fact, a Tangerine survey last year found that only half of Canadians consider themselves knowledgeable when it comes to personal finances.

As personal finance enthusiasts it’s our duty to move beyond this little corner of the Internet and start talking to our friends and family about money.

It’s not easy to talk in real-life about what we do with money, how much we save, how much we spend, and the foolish mistakes we make. But these are crucial conversations to help each other deal with money and the complex decisions about it that we all face.

We can start by sharing the kinds of tips and tricks that helped us build lifelong financial habits and skills. It’s what financial literacy is all about, right?

That’s why I was excited to partner with Tangerine for Financial Literacy Month and list my top 10 financial lessons to share with friends:

1.) Avoid credit card debt like the plague

It’s impossible to go through life without incurring at least some debt. I’ve had student loans, credit card debt, a car loan, line of credit, and finally a mortgage.

Carrying a balance on my credit card was by far the most harmful to my finances. Making the minimum monthly payment hardly puts a dent into the balance, and 19 percent interest ensures that balance will continue to grow.

Tackle it with the debt avalanche or debt snowball method, and once it’s gone commit to never again paying one cent of credit card interest.

2.) Track your spending

To free up that additional cash flow you need to understand how much money comes in and how much goes out every month. There’s no other way around it – how else will you know what you can afford to save?

Whether you use a mobile app, budgeting tool, or good old-fashioned Excel spreadsheet, the point is to track every transaction until you can glean some insight into how you spend your money. Use this information to make informed decisions on which areas of your budget you can cut, and where you’d like to direct any additional savings.

Related: Track your habits, save money

3.) Automate your savings

The key to building a life-long habit of saving is to make your contributions automatic and as painless as possible. Pick a day that coincides with your paycheque and set up an automatic transfer into your RRSP, TFSA, savings account, or RESP.

It’s called paying yourself first. Start with as little as $25 and increase it annually, or as your budget allows. This powerful strategy works because it treats your savings goals as ‘mortgage-like’ fixed expenses that come out of your account on a specific day.

4.) Save a percentage of your income

One rule of thumb suggests saving 10 percent of your take home pay for retirement. I say save a percentage – any percentage – of your income as long as you start with something and make it automatic.

One cool trick I learned was to bump up that percentage in tandem with a salary increase each year. So, for example, let’s say you earn $50,000 and saved 5 percent of that amount ($2,500). Then you get a 4 percent raise in the New Year, so now you make $52,000. Well, don’t just continue saving $2,500 – bump that up to $2,600 to stay in-line with your 5 percent savings rate. Continue Reading…

CPP Reality Check

Repeat after me: The Canada Pension Plan will be there for me when I retire.

In fact, CPP is sustainable over the next 75 years according to the most recent report issued by Canada’s Chief Actuary. This projection assumes a modest 3.9 per cent annual real rate of return over that time.

The plan is operated at arms length from governments by the CPP Investment Board (CPPIB), whose sole mandate is to maximize long-term investment returns in the best interests of CPP contributors and beneficiaries.

Despite this assurance, I still see numerous comments on blogs and social media dismissing CPP as something doomed to fail.

“The feds are robbing the CPP fund to pay for infrastructure and massive debt loads.”

“I’m fairly certain there won’t be a CPP fund in 25 years when I’m ready to retire.”

“My retirement projections don’t include CPP, just in case . . . “

The media exacerbates the problem by reporting on the CPPIB’s quarterly earnings, which, most recently, slumped to 0.7 per cent thanks to a strong loonie dragging down its foreign investments. But to the CPPIB and its long-term investing mandate, a quarter isn’t measured in three months: it’s more like 25 years.

Don’t ignore CPP in your retirement projections

It’s a mistake to ignore CPP benefits in your retirement planning projections. While it won’t save your retirement, CPP is paying out on average $653 per month for new beneficiaries as of July, 2017. The maximum monthly payment amount [if taken at age 65] is $1,114.17.

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Building Wealth: Human Capital vs. Financial Capital

Back in 2003, when I began my career as a young sales manager in the hospitality industry, I earned an annual salary of $26,000. Little did I know at the time that my human capital – as in, the present value of my expected future income throughout my working lifetime – would be worth nearly $3,000,000!

I did some back-of-the-napkin calculations and was surprised to learn I’ve already earned a million dollars over my 15-year career. I find that incredible, given that I’ve never earned a six-figure salary and, in fact, my wages have been stagnant for the past four years.

Projecting my income forward using a modest 3 per cent annual growth rate reveals the potential to earn another $2 million by the time I turn 55.

Human Capital vs. Financial Capital

Put in different terms, however, and you can see that my human capital is shrinking each year. That’s because the value of my human capital peaked the day I started my career (back in 2003) with my entire lifetime of earnings ahead of me. Since then I’ve steadily used up my earning power and the value of my human capital has gradually declined.

The idea of eroding capital doesn’t sit well with me, but that’s where the second form of wealth building – your financial capital – comes into play. See, I’ve been a diligent saver for most of my career, which means converting my human capital (earnings) into financial capital (investments). Continue Reading…