My latest MoneySense Retired Money column was just published, focused on Monday morning’s release of the 2019 RBC Financial Independence in Retirement poll.
And yes, they did use my term Findependence in the headline, which is a neologism I coined and is of course merely a contraction for Financial Independence.
May as well save a few keystrokes and/or syllables!
As I note in the column, I like the fact that RBC uses the term Financial Independence instead of the more commonly used “Retirement.” The two are not the same thing: it’s possible to be financially independent but not retired (that’s the case for myself and possibly many who frequent this website). But as I also note, it’s pretty hard to be retired if you’re NOT also financially independent. If the distinction eludes you, read my book Findependence Day.
In its poll, RBC can’t resist throwing out the figure $1 million as the level many non-retired Canadians believe is necessary to amass: not for “Retirement” per se, mind, but for what they call “a comfortable financial future.”
Call it what you will but RBC identifies four “top motivators” to accumulating such a nest egg: being debt-free, having things to make life more comfortable, having money to take part in desired experiences, and having enough to travel wherever you want.
BC needs $1 million for Findependence, Quebec just $427,000
So how much does it take to get there? Apparently, those in British Columbia need a little more than the rest of us: $1.07 million, compared to a national average of $787,000. Continue Reading…
It summarizes the new enhanced Canada Pension Plan regime, which has (as of this month) started to show itself in slightly higher payroll deductions for both employers and employees.
Won’t fully kick in for 45 years
But as the piece explains, the enhanced CPP won’t fully kick in until 45 years from now, and most Baby Boomers will be retired before feeling any benefits beyond that of the normal practice of delaying CPP till age 70. And as one source explains, even the expanded CPP still isn’t as generous as Social Security is in the United States. Not only do they pay slightly higher payroll premiums to fund Social Security, but they also pay based on a much higher level of income.
U.S. Social Security still more generous
US contributions are up to US$132,900 in income, compared to about half that in Canada: a Year’s Maximum Pensionable Earnings limit (YMPE) of $57,400 in effect in 2019. CPP was originally designed to “replace” about 25% of the average worker’s income but the enhanced CPP will take that up to about 33.3% once it’s fully implemented. Gradually, the limit will rise to $65,400 (rounded down, 2019 dollars.)
While the full payout is 45 years away, benefits start edging up this year. Until now, the maximum CPP benefit at the traditional retirement age of 65 was $1,154.58 assuming earnings at or beyond the YMPE, according to Doug Runchey, of Vancouver Island-based DR Pensions Consulting.
The maximum benefit will be $1,207.83 in 2026, and eventually reach $1,753.78 by 2065. That’s a whopping $21,045 a year!
Too late for the Boomers
Still, Runchey says, “if you’re thinking of applying for your CPP earlier than 2025, the enhanced CPP will be of little value for you.”
As I said at the outset, that’s unlikely to be helpful for Baby Boomers at or on the cusp of retirement. Even so, the combination of an enhanced CPP and the decade-old Tax-free Savings Accounts (TFSAs) is something most Boomers wish they had when they were young!
For more on the enhanced CPP, go to the Government of Canada’s website here.
Welcome to 2019! Now that it’s January you can contribute $6,000 to your Tax-free Savings Account (TFSA), a program that’s now been around a full decade. That means couples can between them contribute $12,000.
The previous annual maximum was $5,500, but because of Ottawa’s promised inflation “bump” it has now officially been adjusted to $6,000. Recall that it was originally $5,000 when the program was introduced back in January 2009. Hard to believe it’s been ten full years now!
As the chart below illustrates, the cumulative limit (shown on the far right column) is now $63,500, which means a couple can between them invest $127,000. The first inflation adjustment was in 2014, when the limit reached $5,500. Under the Harper Tories it actually was almost doubled to $10,000 for calendar 2015 but one of the first things the Trudeau Liberal administration did was to reverse it back to $5,500 in 2016. It’s been $5,500 for three years until the new $6,000 limit that’s now in place.
2009
$5,000
$5,000
2010
$5,000
$10,000
2011
$5,000
$15,000
2012
$5,000
$20,000
2013
$5,500
$25,500
2014
$5,500
$31,000
2015
$10,000
$41,000
2016
$5,500
$46,500
2017
$5,500
$52,000
2018
$5,500
$57,500
2019
$6,000
$63,500
In the early years of the program, it might have been tempting to dismiss the original $5,000 as being an “insignificant” amount but obviously $63,500 is a hefty amount and anyone who has been contributing the maximum from the get-go should with tax-free growth have considerably more than that by now: I often hear from readers who have more than $100,000 in them, although December’s brutal stock market action is likely to have set them back a bit.
Maximize the time value of money
Why contribute the new $6,000 right now? I view this as a “time value of money” exercise and you may as well maximize the compounding effect of tax-free growth, assuming you are focusing on equities. Except for profoundly conservative investors, I’d recommend that Millennials and Generation X members use the TFSA primarily for Growth (equities or stocks, or equity ETFs). Baby boomers at or near Retirement could use Balanced Funds or ETFs (like VBAL from Vanguard, which is 60% stocks to 40% bonds, spread around thousands of securities around the world.) That’s likely the one we’ll use ourselves this week: we put the money into our discount brokerages on January 1st, but will actually invest it before the week is out, once markets are open.
Keep in mind that you can keep adding to your TFSA well into old age: I know a lady who is more than 100 years old who continues to do just that! That’s a lot of potential growth, which is why a balanced product may make sense. Of course, those who value interest income and wish to eschew stock-market risk can also use bond ETFs or GICs in their TFSAs: these days even 2-year GICs can be found that pay 3% or more.
Despite Tuesday’s 3% plunge in US stock markets, Franklin Templeton money managers are optimistic most major asset classes will deliver positive if muted returns in 2019.
At the 2019 Global Market Outlook event in Toronto, William Yun, New York-based executive vice president for Franklin Templeton Multi-Asset Solutions, projected 7-year annualized returns for Canadian equities of 5.7%, compared to a 7.5% average the last 20 years [as shown in above chart]; 5.7% for U.S. equities (versus 7.4% historically), 6% for international equities (versus 5.5%), and 7.2 versus 9.4% for Emerging Markets. On the fixed income side, he is projecting 2.3% annualized 7-year returns for Government of Canada bonds (versus 4.7% historically the last 20 years), and 3.2% for investment grade corporate bonds (versus 5.2%).
All this is in an environment of continued desyncronized global growth (of 3%) and moderate inflation expectations. Long term, Yun is particularly optimistic about the long term growth of Emerging Markets equities, which at 5% is two-and-a-half times the 2% growth expectation for developed market equities. This optimism is based on positive population growth and labor productivity in Emerging Markets. Globally, inflation “remains muted” and “we don’t see many excesses in the global economy generally.” There are however, some excesses in the U.S. labor market.
More normalized interest rate environment
William Yun, Franklin Templeton Multi-Asset Solutions
Capital spending growth patterns are supportive and trending upwards since the 2016 US election, with the transition from very low interest rates post the financial crisis to a “more normalized interest rate environment.” The opportunity is to reinvest capital to more productive assets, as opposed to allocating to corporate share buybacks.
With respect to central bank balance sheets, markets are normalizing around the world, transitioning from excessive Quantitative Easing to Quantitative Tightening and shrinking balance sheets. Assets quadrupled at the Fed between US$1 trillion in 2008 to $4 trillion today as the Fed committed to buying bonds, with liquidity tapering off. He has similar expectations for the ECB, which has announced the ending of its QE programs, and it’s the same with Japan and China. “Central bankers are pulling back on Quantitative Easing.” There is a “restart of normalization in interest rate policy.”
Rising volatility
Even as the Dow Jones Industrial Average was in the process of tanking almost 800 points Tuesday, Yun predicted rising volatility after a period of relative calm. In that environment, “investing passively [in index products] has been the way to go but we anticipate volatility returning.” With higher interest rates and more volatility, it may be a time for active management, Yun said, acknowledging his own firm’s expertise in active security management.
Emerging Markets gross domestic product (GDP) continues to rise relative to the rest of the world, from 40% in 1990 to 60% in 2017, and Yun expects that percentage to move higher still. The trend is driven by rising consumption growth for the middle class, which benefits industries like consumer staples and consumer discretionary stocks, technology and even investment management.
Emerging Markets are showing reduced reliance on developed markets, which are slowing. Whereas in 2007 eight of the top trade markets were with the United States, in 2017-2018 China has supplanted the US, with 8 of the top 14 destinations.
In short, Yun sees a supportive global market for risk assets but lower returns: positive growth and moderate inflation, with increased volatility.
Ian Riach, Fiduciary Trust Canada
Ian Riach, Chief Investment Officer for Fiduciary Trust Canada and a senior vice president of Franklin Templeton Multi-Asset Solutions, says it makes sense in this environment to make some “dynamic” (i.e. tactical) shifts to long-term Strategic Asset Allocation. Currently, the firm is underweight Canadian equities and Canadian bonds, because the loonie has been getting weaker and Canada is facing a number of challenges ranging from trade to energy to a shrinking manufacturing base, all of which “affects growth going forward.” In the short term, Riach expects short-term interest rates in the United States will be higher than in Canada, “given that they are growing more quickly than us.”
Flat yield curve
Even after the recent rate back-up, “we think Government of Canada bonds are expensive, Continue Reading…
My latest MoneySense Retired Money column looks at a financial planning software platform called Viviplan. You can find the full article by clicking on the highlighted text: What I learned by putting Viviplan to the test.
Viviplan is the third retirement planning package I’ve tested this year, perhaps — as the MoneySense article reveals — the topic is getting all too real for me now that my wife, Ruth, has told her employer she plans to retire when she turns 65 next summer. I’m a year older and have been somewhere between self-employed and semi-retired for most of my 60s.
All these packages deserve consideration and work in more or less similar fashion. To do the job justice, you need to have handy — or at least summary information — such documents as your latest tax returns, brokerage statements, Service Canada CPP and/or OAS projections, as well as having a good grasp of your regular and occasional monthly expenses.
Having most recently performed this exercise with Viviplan — and as one of the users we interviewed for MoneySense relates — it can be a bit scary to see in black and white just how expensive daily living can be. The package won’t let you forget any tiny expense, from pet food to boarding your pet when you’re on vacation (or arranging to hire a neighbour’s teenager, which is what we do if we go away and must leave our cat behind.)
Viviplan calls itself a Robo Planner
Viviplan — which has been dubbed “Canada’s Robo Planner” — is the brainchild of financial planner Rona Birenbaum. Birenbaum also runs a separate fee-for-service financial planning firm called Caring for Clients. I have consulted her for various pieces in the past, particularly about annuities.
Indeed, when I was putting Viviplan through its paces, one of the big questions I had was whether there was a need for us to partly annuitize, seeing as Ruth has no employer-provided Defined Benefit pension at all (just a hefty RRSP), and I have only two modest DB pensions that are not inflation-indexed.
Viviplan’s Morgan Ulmer
Our main question was whether to make up for this lack of employer pensions by at least partially annuitizing, or what Moshe Milevsky and Alexandra McQueen call in the title of their book Pensionize Your Nest Egg. Another author, Fred Vettese in Retirement Income for Life, was in a similar situation when he reached 65 (the same month as I did) and had suggested annuitizing 30% of his nest egg at 65 and doing another 30% at age 75 (assuming CPP at 70). Our question for Viviplan was whether this would make sense for us too, or just for Ruth.
We went back and forth with Calgary-based certified financial planner and product manager Morgan Ulmer (pictured to the right). As she relates in the MoneySense piece, “it’s certainly not necessary,” since at today’s interest rates, Viviplan told her that for us a pure GIC portfolio could get us to where we want to go, with the virtue of more financial flexibility and higher final estate value. Like the other programs, Viviplan recommends delaying CPP till 70 and OAS too if possible.
Annuitize? No wrong decisions and no rush
Partial annuitization for Ruth along the lines of what Vettese suggests would result in a slightly lower estate for our daughter. “With annuities, you are making a choice between legacy and flexibility versus security and longevity protection,” Ulmer said in the plan’s written recommendations, “There are no wrong decisions here, and there is also no rush.” Continue Reading…
Posted By 
My latest MoneySense Retired Money column was just published, focused on Monday morning’s release of the 2019 RBC Financial Independence in Retirement poll.
