The 2018 edition of the MoneySense ETF All-Stars has just been published: you can read the whole article by clicking on the highlighted headline: The Best ETFs for 2018.
The “All-Star” portfolio consists of a 7-person expert panel plus myself. While the number of ETFs trading in Canada have reached 583, the All-Star list is now at 20, up from 14 a year ago. We added one to each existing category (except international equity) and
created a new category: the panel was unanimous in declaring the three new Vanguard Asset Allocation ETFs as All-Stars. See the Hub’s February 1st commentary on the launch of those three new products: Gamechanger.
In addition to adding the new category we call “One Decision” Packages, the panel added a single new ETF in three of the four existing categories: Canadian equities, US Equities and Fixed Income. We stood pat on the three international equity ETFs, although that asset class is also covered by the new Vanguard products.
Canadian equities
New in Canadian equities is the BMO S&P TSX Capped Composite IDX ETF (ticker ZCN), which expands the list from the returning three picks: Vanguard FTSE Canada ;All-cap Index ETF (VCN/TSX) XIC: the iShares Core S&P/TSX Capped Composite Index ETF; and HXT: Horizons S&P/TSX 60 ETF.
The panel was unanimous in retaining all three of these picks, since the trio maintain the lowest management fees among the segment, and HXT is particularly tax efficient and low cost for non-registered portfolios. But the panel agreed with Forstrong’s recommendation to add ZCN, which has the same rock-bottom annual fee of 0.05% as VCN and XIC. ZCN now has more assets than VCN.
US Equities
The panel agreed to add a fourth pick to the US all-cap space, again from BMO: BMO S&P500 Index ETF (CAD), ticker ZSP. As the Forstrong team observed, ZSP’s fee of 0.08 is the same as VFV’s and the fund now has the most assets of the four core US ETFs.
Two of our returning US equity picks are the hedged and unhedged versions of Vanguard Canada’s S&P 500 ETFs: VSP and VFV respectively, plus the iShares Core S&P US Total Market ETF (XUU.)
Fixed Income
The panel added a sixth ETF to the existing lineup of fixed-income ETFs: the iShares Core Canadian Short Term Bond Index ETF (XSB). Continue Reading…
If you lack what finance professor and author Moshe Milevky calls a “real” pension (i.e. an employer-sponsored Defined Benefit plan), then you’re a likely candidate for annuitization or at least partial annuitization of your RRSP and/or RRIF.
My latest MoneySense Retired Money column revisits Fred Vettese’s excellent new book, Retirement Income for Life, and in particular his third “enhancement” suggestion for maximizing retirement income. We formally reviewed Vettese’s book in the MoneySense column before that, and commented on it further here at the Hub.
You can find the new piece drilling down on the partial annuitization enhancement by clicking on the highlighted headline: RRIF or Annuity? How about Both.
One of the main sources in the piece is fee-only planner Rona Birenbaum (pictured above with Fred Vettese), who has some useful videos on YouTube about annuities, including an interview with Vettese about the partial annuitization strategy described in the new MoneySense column. See Is it time for annuities?
Expect an annuity wave from retiring boomers without DB pensions
Certainly you’re going to hear a lot more about annuities as the baby boomers move seriously from Wealth accumulation mode to de-accumulation, aka “decumulation.” Coincidentally both Vettese and I are 1953 babies with April birthdays. In an interview with Fred, he told me he bought some annuities a year ago and that he believes that those who plan to retire at age 65 (and who lack a traditional employer-sponsored Defined Benefit pension) should consider at least partly annualizing at 65, to the tune of roughly 30% of the value of their nest egg (typically in an RRSP or RRIF). That means registered annuities.
Certainly, in light of the 10% “correction” in stocks that occurred in the last few weeks, the possibility of a more severe stock market retrenchment has to be upper most in the minds of soon-to-retire baby boomers. I note in his recent G&M column, Ian McGugan (in his early 60s) confessed he was slowly starting to take some profits from stocks and move them to safer fixed-income investments like GICs. See The Market’s gone mad: Here’s how to protect yourself. See also Graham Bodel’s article earlier this week: Response to an investor who frets the market is going to crash.
Annuities are one way to hedge against market risk, since you’re in effect transferring some of the market risk inherent in an RRSP or a RRIF to the shoulders of the insurance company offering the annuity. That’s one reason in the YouTube video above, Vettese talks about partly annuitizing as soon as you retire, whether that be age 65, or sooner or later than that traditional retirement date.
Financial advisors may not agree with all of Vettese’s five “enhancements.”
The earlier column reviewing the book mentioned that not many of Vettese’s “enhancements” to retirement income may be endorsed by the average commission-compensated financial advisor. Even so, as the Royal Bank argued earlier this year here at the Hub, annuities can help fund a full lifestyle in retirement. It observed that 62% of Canadians aged 55 to 75 are worried they’ll outlive their retirement savings but only 10% use or plan to use an annuity to ensure they’ll have a viable lifestyle in retirement.
Regular Hub contributor Robb Engen — a fee-only financial planner who also runs the Boomer & Echo website — wrote recently (on both sites) that annuities are one way retirees or would-be retirees without traditional DB pensions can Create their own personal pension in retirement.
As I note in the MoneySense column, while I’m certainly approaching the age when partial annuitization may make sense, I’ll probably wait a year or two. But in preparation for that possibility, as well as for the column, I asked Birenbaum to prepare three quotes for a $100,000 registered annuity, starting at ages 65, 70 and 75. As you might expect, the longer you wait to begin receiving payments, the higher the payout, but it’s not such a massive rise that you could rule out early payments if you really needed them to live on.
The mechanics of buying an annuity
And should you be ready to take the step, it’s not all that complicated. In the above case, you would liquidate $100,000 worth of investments in your RRSP so the cash is available to transfer, then complete an annuity purchase application and fill out and submit a T2033 RRSP transfer form. That form is sent to your RRSP administrator, and they transfer the cash to the insurance company without triggering tax. Once all these preliminary steps have been taken, payments begin the month following the annuity purchase.
Oh, and one last step, Birenbaum adds: Start relaxing!
The Liberals’ 2018 federal budget that descended on us on Tuesday afternoon is pretty much what you’d expect from the Justin Trudeau administration at this slightly-past-the-midway point of its mandate: lots of spending on things like gender pay equity, parental leave, native rights. Another stab at sin taxes, with a carton of 200 cigarettes going up by $1 and a proposal for excise duties on cannabis if and when marijuana becomes legal in July. A bit of business tax reform scaled down from the measures that so incensed small business last fall. As for balancing Ottawa’s books? Not so much.
Here’s the Globe & Mail’s overview that went up soon after 4 pm: Federal budget highlights: 12 things you need to know. In case you’ve met the paywall limit on free views, it reports that the budget is in line with previous estimates from Finance Canada, which means deficits for the “foreseeable future.” Pay equity legislation is proposed for federal government employees and federal regulated sectors. And $447 million will be spent over 5 years to create a new indigenous Skills and Employment Training Program (replacing the Aboriginal Skills and Employment Training Strategy). And another $1.4 billion or more over 6 years is proposed for First Nations child and family services.
A National Pharmacare program is being “consulted” on. More detail on passive income and private corporations: companies with more than $150,000 in passive income will no longer be eligible for the small business tax rate, while those with under $50,000 oil passive income will not be affected. In between is a formula. Also more than half a billion will go to Cybersecurity, and $3.8 billion over 5 years will go to “support science.” And journalism has not been forgotten: the budget proposes $50 million over 5 years to support journalism in “underserved communities.”
Carrick sees 7 changes affecting personal finances
Here’s Rob Carrick’s piece on 7 changes that could affect your finances. Carrick writes in the Globe that Ottawa will be modernizing deposit insurance, replace the Canada Working Income Tax Benefit with the introduction of a Canada Workers Benefit, which raises benefits by up to $170 a year in 2019 for single parents and couples, while raising the level at which the benefit is phase out from $32,339 to $36,483. The Sears bankruptcy appears to have stimulated consultation on pension security, while as of June 2018 an extra five weeks of parental benefits will be available when parents share parental leave. (Yes, Justin Trudeau’s government wishes to encourage more men to take pat leave!) There is also an expansion of the medical expense tax credit and a move to strengthen the oversight of bank sales practices by the federal Financial Consumer Agency of Canada.
Coyne: Budget has nothing to do with budgeting; Ivison: Liberals show their cunning
Back at the National Post, you can get useful video insights from columnists Andrew Coyne, John Ivison and William Watson here. Coyne’s column is titled Liberals deliver a federal budget that has nothing to do with budgeting, or the economy. In it, he wryly observes that the Liberals are pandering “to every conceivable Liberal client group and policy cult: environmentalists, seasonal EI recipients, multiculturalism, official language groups, regional development, all the way to the media … And, of course, feminists.”
Can you trust your retirement to a robot? Illustration by Chloe Cushman/National Post files
With the annual RRSP season coming to a close next week (the RRSP contribution deadline is March 1st), there’s plenty of media coverage to remind investors of this fact. Two this week came from my pen (or electronic equivalent).
By robot, we are referring of course to so-called Robo-Advisers or automated online investment “solutions” that generally package up various Exchange-traded Funds (ETFs) and handle the purchase, asset allocation and rebalancing at an annual fee that’s generally is far less than what a mutual fund or two might deliver. (that is, usually 0.5% plus underlying ETF MERs, compared to 2% or more for most retail mutual funds sold in Canada.)
The piece begins with a fond nod to a topic I used to write about periodically in the FP in the 1990s, at the height of so-called Mutual Fund Mania. It was then that I would write about a set-it-and-forget it approach we dubbed the Rip Van Winkle portfolio, which was simply two mutual funds (Trimark Income Growth, a balanced fund) and a global equity fund (Templeton Growth) that in effect did (and still do, I suppose) everything the modern robo advisers do. The difference is that because of ETFs, the robo services are about a quarter of the price of the old “Rip” portfolio.
But speaking of undercutting, and as the piece also notes, both “Rip” and the robo services have been undercut by the three new Vanguard asset allocation ETFs that were announced on February 1st, more of which you can find in the Hub blog I wrote at the time: Gamechanger? As I noted there, the Vanguard ETFs seem to be ideal for TFSAs (especially VGRO, the 80% equities offering) but of course they are also ideally suited for a “Rip” like RRSP core offering: VBAL (60% equities) for the typical balanced investor, VCNS (40% equities) for very conservative investors and perhaps those now in the RRIF stage who are required to make forced annual (and taxable) withdrawals.
Motley Fool Canada: 11 myths equals 11 lame excuses for not maxing your RRSP
Meanwhile, Motley Fool Canada has just released a special report I wrote titled The 11 Most Common RRSP myths. The report builds on several RRSP myths that CIBC’s Jamie Golombek published earlier this year, which you can find here, and my FP commentary on them here. The report adds several new myths submitted from veteran advisers like Warren Baldwin.
You can also view this promotional email on the RRSP report by Motley Fool Canada Chief Investment Officer Iain Butler.
Once they move from the wealth accumulation phase to “decumulation” retirees and near-retirees start to focus on how to boost Retirement Income.
The latest instalment of myMoneySense Retired Money column looks at five “enhancements” to do this, all contained in Fred Vettese’s about-to-be-published book, Retirement Income for Life, subtitled Getting More Without Saving More. You can find the full column by clicking on this highlighted headline: A Guide to Having Retirement Income for Life.
You’ll be seeing various reviews of this book as it becomes available online late in February and likely in bookstores by early March. I predict it will be a bestseller since it taps the huge market of baby boomers turning 65 (1,100 every day!): including author Fred Vettese and even Yours Truly in a few months time.
That’s because a lot of people need help in generating a pension-like income from savings, typically RRSPs, group RRSPs and Defined Contribution plans, TFSAs, non-registered investments and the like. In other words, anybody who doesn’t enjoy a guaranteed-for-life Defined Benefit pension plan, of the type that are still common in the public sector but becoming rare in the private sector.
The core of the book are the five “enhancements” Vettese has identified that help to ensure that those seeking to pensionize their nest eggs (to paraphrase the title of Moshe Milevsky’s book that covers some of this ground) don’t outlive their money. Vettese says many of these concepts are current in the academic literature but have been slow to migrate to the mainstream, in part because few of these “enhancements” will be welcomed by the typical commission-compensated financial advisor. That in itself will make this book controversial.
Each of these “enhancements” get a whole chapter but in a nutshell they are:
1.) Enhancement 1: Reducing Fees
By moving from high-fee mutual funds or similar vehicles to low-cost ETFs (exchange-traded funds), Vettese explains how investment fees can be cut from 1.5 to 3% to as little as 0.5% a year, all of which goes directly to boosting retirement income flows. One of his takeaways is that “Tangible evidence of added value from active management is hard to find.”
2.) Enhancement 2: Deferring CPP Pension
We’ve covered the topic of deferring CPP to age 70 frequently in various articles, some of which can be found here on the Hub’s search engine. Even so, very few Canadians opt to wait till age 70 to collect the Canada Pension Plan. Because CPP is a valuable inflation-indexed guaranteed for life instrument — in effect, an annuity that you can never outlive — Vettese argues for deferral, although he (like me) is fine with taking Old Age Security as soon as it’s available at age 65. He argues that for someone who contributed to CPP until age 65, they can boost their CPP income by almost 50% by waiting till 70 to collect. “You are essentially transferring some of your investment risk and longevity risk back to the government, and you are doing so at zero cost.” Continue Reading…
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