All posts by Jonathan Chevreau

Generation X feeling the Retirement squeeze

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Generation X, and to a lesser extent the Millennials, are already starting to feel the retirement squeeze, according to a Franklin Templeton-sponsored survey released Thursday.

Details are in my column in Friday’s Financial Post, which you can retrieve by clicking on the highlighted headline here: Generation X is ‘stretched beyond their financial limits’ and struggling to save for Retirement. 

The challenges should be familiar to members of any generation (four are mentioned in the survey): it’s never easy saving money when you’re starting out in life with low wages and high expenses. But Franklin Templeton cautions against the  rationalization embraced by younger investors that they simply can  choose to keep on working if they haven’t accumulated enough assets to generate adequate income in retirement.

That may not always be an option, since ill health or corporate downsizing (to mention just two) may prevent this. You can find full details about the fifth annual edition of Franklin Templeton Investments Canada’s 2018 Retirement Income Strategies and Expectations (RISE) survey here.

Stressed GenX resigned to retiring later than hoped

More than half of Gen Xers (aged 37 to 52) are resigned to retiring later than they would want (56% in Canada, 59% in the US). While the online survey included Canadians and Americans across four generations, “this year we felt in particular that Gen X and the stress of preparing for Retirement was the predominant thing coming out of the research,” said Matthew Williams, a Franklin Templeton senior vice president, in an interview.

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Retired Money: Tontines moving from academia to Retirement marketplace

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Annuity and Tontine expert Moshe Milevsky

My latest MoneySense Retired Money column, just published, looks at how the 17th century “tontine” scheme may help solve 21st century angst about outliving your money in Retirement. Click on this headline to retrieve the whole article: Why Ottawa needs to push for tontine-type annuities.

We have described Moshe’s pioneering work in annuities and tontines before: the York University finance professor and prolific author has published entire books on tontines and annuities. As he outlines in Pensionize Your Nest Egg, Milevsky has always emphasized the distinction between what he calls “real” pensions (guaranteed-for-life Defined Benefit pensions) and capital-appreciation vehicles like RRSPs or Defined Contribution plans, which have to be “pensionized” (or “annuitized”)before they can be considered to be “real” pensions.

Milevsky and three fellow Canadian co-authors have just published a paper partially funded by the pension section of the U.S. Society of Actuaries,entitled Annuities versus Tontines in the 21stCentury: A Canadian Case Study. (The other authors are Thomas Salisbury, Gabriela Gonzales and Hanna Jankowski). In it they make the case for the reintroduction of retirement investment income tontines (RITs) into the modern financial supermarket.

For those who haven’t seen the film The Wrong Box, tontines are mortality-linked investments that superficially resemble life annuities but were quite popular in Europe in the 17thand 18thcentury and later America. But they fell into disrepute by the early 20thcentury, in part because of the kind of sordid image they received, often popularized by novels and films like The Wrong Box. The “longest-living” winner takes the pot, which is why creative artists have often used this as a plot device involving skulduggery.

In essence, tontines pool capital and distribute all the capital and investment gains to those who live the longest: those unlucky enough to die early forfeit the capital (i.e. their heirs forfeit it), while those who live the longest benefit with super returns.

While a tontine revival could make sense around the world – the pension and longevity trends are almost universal – they make particular sense in Canada. The authors state they “believe that Canada has a dearth of products for hedging personal risk, compared to the U.S. market.” They know of no Canadian insurance company that offers a true deferred income annuity (DIA or ALDA), not do they offer a variable income annuity or equity-indexed annuities with living benefits: all available in the US. The closest we have are segregated funds, and they really aren’t that great as far as guaranteeing lifetime income, Milevsky told me. Continue Reading…

GreedyRates.ca: The 5 degrees of Financial Freedom

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Image: GreedyRates.ca/Shutterstock

My first article for GreedyRates.ca ran over the weekend. Click on The 5 Degrees of Financial Freedom for the full article. It talks about how many terms in personal finance are used interchangeably, and often imprecisely: financial security, financial independence, retirement and especially financial freedom.

I suggest that most of us travel through a financial life cycle as predictable as the human life cycle, and there is a corresponding hierarchy of growth stages that we need to keep in mind in order to continually meet and exceed our financial goals. But because the term financial freedom can apply to so many stages, I argue it’s better to use more precise terms to identify the various degrees of Financial Freedom.

From the 5-stage hierarchy below, I argue that the key milestone in our financial lives is Findependence (a contraction of Financial Independence), a turning point that I define as the moment all sources of passive income exceed your monthly living expenses. Note that the full version at GreedyRates.ca contains three key bullet points for each of the stages, for a total of 15. Below, I summarize just the stages themselves.

Stage (Sub) 0: Indebted Wage Slavery

We may start out our financial lives with student debt, credit-card debt or mortgage debt in the early years of forging careers and raising families. Whatever its nature, debt keeps you chained to employment or work of some type.  Since those starting their financial journey in debt haven’t really begun their financial journey at all, I call the preliminary stage Stage 0. As a character in my financial novel, Findependence Day, tells a young Millennial couple still in debt: “You can’t climb the tower of wealth while you’re still mired in the basement of debt.”

Stage 1: Financial Security

The next level to aspire to in the ascending hierarchy is Financial Security. In this stage you have eliminated your debts and have accumulated enough wealth so that your absolutely necessary monthly expenses (rent/mortgage, food, utilities, travel and basic entertainment) are taken care of for the near future.

Stage 2: Financial Vitality

It can take a long time just to establish a modicum of financial security but I argue you need to aim higher than mere financial survival and embrace what Tony Robbins dubs Financial Vitality. You want enough flexibility in your cash flow that, after the necessities are taken care of, you can enjoy little luxuries like new clothing or intangibles like gym or yoga memberships, and attend the occasional sporting or cultural event. It’s the difference between financially surviving and financially thriving.

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Retired Money: The Four Phases of Retirement

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As anyone who has left full-time employment probably knows, these days Retirement is seldom a one-time sudden event. Just as an airplane doesn’t vertically descend instantly in order to land but begins its descent hundreds of kilometres away, so too do formerly fully employed workers usually gradually cut back. In fact, as my latest MoneySense Retired Money column says, there are at least four phases of Retirement. Click on the highlighted text to retrieve the full online column: The Four Phases of Retirement.

That’s according to former financial adviser and retiree Riley Moynes, who has prepared thousands of clients for retirement over his long career. His views are encapsulated in a short booklet titled just that: The Four Phases of Retirement. The subtitle is What to Expect When You’re Retiring, which is a clearly a nod to the bestselling book on pregnancy. 

Having just reached the traditional retirement age of 65 earlier this month, I can attest to the gradual nature of Retirement, which in earlier Retired Money columns referred to the glide path analogy made above.

So what are the 4 phases?

Phase 1: Extended Vacation

This is the classical honeymoon phase that full-time workers imagine amounts to a permanent vacation. It typically involves extended travel, the chance to indulge in hobbies, spend more time with the family and (especially!) one’s spouse.

Phase 2: The plunge into the abyss of insignificance

This “drop from the top” can be one of the top ten traumas human being faces in their lives. With it comes the reality of five “unavoidable losses”: structure, identify, relationships, a sense of purpose and a sense of power.

Phase 3: Trial & Error

The retiree starts to realize the sands of time are starting to slip rapidly away and that if you are to accomplish anything with what time remains, it had better be soon. The dominant question here is “How can I contribute?” You tentatively start a few ventures and eventually commit to one but are prepared to go back to the drawing board if it doesn’t work out.

Phase 4: Reinvent and Repurpose

Not everyone reaches this stage (indeed, some may go back to Phase 1 and just kick back and enjoy themselves again) but for those who yearn to  leave a legacy, Phase 4 is the place to do it. The retiree ask three questions designed to identify one’s unique ability: What do you absolutely love to do? What do you do very well? And what attributes or skills have led to success in the past?

Moynes now gives workshops on Retirement (see www.thefourphases.com) and also published a companion book in 2017 titled The Ten Lessons: How You Too Can Squeeze All the “Juice” Out of Retirement (see www.thetenlessons.com).

The 2018 MoneySense ETF All-Stars

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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…