Decumulate & Downsize

Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.

Retired Money: Sears Canada pension outcome could pave way for copycats

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My latest MoneySense Retired Money column looks at the fate of members of the Sears Canada pension plans (DB and DC). You can find it by clicking on the highlighted headline here: What Sears retirees can do about the reduced DB pension.

While the focus is not per se on the demise of Sears Canada itself, and the loss of thousands of jobs, I refer readers to an excellent article by the Globe & Mail’s Marina Strauss (it may only be available to subscribers): Who Killed Sears Canada?

Not only will many retirees get an estimated 19% haircut on their promised pensions, but thousands of workers have lost their jobs without severance, and lost health and dental benefits. My MoneySense column reiterates that Ontario members of the Sears DB pension will be better off than Sears retirees in the other provinces, because of the Pension Benefits Guarantee Fund in Ontario, which we looked at a few columns back. Roughly half of Sears employees and retirees live outside Ontario.

Should workers take Commuted Value?

One of the questions before Sears retirees is whether to take the Commuted Value of the pension, if and when that option is offered, or to sit tight and wait for the promised pension benefits, even if they are — as expected — roughly 19% lower than they should have been. (The plan is roughly 81% funded.) Continue Reading…

How alternative investments protect your Retirement in a down market

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By Matthew Ardrey

Special to the Financial Independence Hub

When I review the portfolio of new clients as part of their financial plan, they almost always have at least one of the following concerns on their mind. They ask how long can stocks continue to climb, given it has been an eight-year bull market or how can their portfolio earn any income with interest rates being so low. More often than not they ask both.

These are real concerns I hear from real people I meet. More and more I am finding that traditional investment solutions are not enough on their own.

Consider how our investment world has changed since 1990. In 1990, an investor could purchase a Government of Canada bond yielding 9.9%, invest in equity markets with a 15X Price Earnings Valuation and lived on average to age 77. In 2017, that same Government of Canada bond yields 1.5%, the Price Earnings Valuation has increased to 22X and average life span is 82 years.

Coping with longer lives, low interest rates and inflation

So the average Canadian investor is now facing a longer life, with fully valued or overvalued equity markets and a fixed-income yield that barely keeps up with inflation even before taxes. Traditional investments can offer little in the way of a solution, especially without increasing the risk profile of my client.

This is where alternative investments can add real value to a portfolio.

Many alternative investment strategies provide yields well in excess of the 1.5% bond yield mentioned above, often averaging annual returns in the 6 to 8% range. The income produced from this part of the portfolio can be used to supplement the low current yields on fixed income.

In addition to return enhancements, alternative investments have a very low correlation to traditional investment markets. What this means is, their performance is not meaningfully impacted by changes in the equity markets. This not only provides diversification, but also portfolio preservation in times of negative volatility.

What are alternative investments? They are any investment that is not a public stock, bond or cash security. Some examples would be private debt, infrastructure, real estate and private equity. They invest in private income oriented investments they can generate stable, high levels of income or by using sophisticated equity hedging strategies to reduce volatility.

Alternatives can have barriers to entry

As with all great things, many investors will wonder, “What’s the catch?” Though there is no “catch” with alternative investments, there are barriers to entry for the average investor. The two main barriers to investing in alternative investments are:

  1. High investment minimums because the investor is not an Accredited Investor (has $1 million in investable assets or $300,000 of income)
  2. Many financial firms do not have the specialized skill set to analyze these investments and thus do not offer them

Though these barriers exist, they can be surmounted by engaging with an appropriate investment counselling firm. The advice provided by an investment counselling firm will allow an investor to access the alternative investment even if not accredited. The firm chosen should have a process to identify alternative investment solutions with proven money managers who have strong track records and a disciplined investment process. Thus, they can engage in the relationship with the alternative investment manager on your behalf.

During the past 30 years, pension plans have been achieving some of the highest returns. It is no coincidence that during the same time period their allocation to alternative investments has also increased substantially to enhance returns and decrease volatility risk.

Institutions have tripled allocation to alternatives

According the annual asset mix report produced by the Pension Investment Association of Canada, which reports on the $1.6 trillion invested by Canadian pensions, the allocation to alternative investments has increased from 10% in 1990 to 33% in 2015. This is an increase of over 200%!

These funds hold the financial future of thousands if not millions of Canadians in their hands. The “smart money” is moving out of the traditional investment world into the alternative one. Now you have the opportunity to do the same.

The world was a very different place in 1990. Brian Mulroney was Prime Minister of Canada, Microsoft released version 3.0 of Windows and The Simpsons first aired on TV. It only makes sense that the investing world would have changed since that time too. If your portfolio isn’t positioned to take advantage of the new investing reality, then my only question is what are you waiting for?

Matthew Ardrey, CFP, R.F.P., CIM, FMA is a VP, Wealth Advisor with TriDelta Financial. He has been providing unbiased advice to his clients on their financial planning and investment management needs since 2000. He can be reached at matt@tridelta.ca.

 

In Victory Lap it’s not about “more money”

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One of Steve Nease’s cartoons from Victory Lap Retirement

My view about money changed once I left the corporate world. “Why?,” I wondered.

Early in my life I was lead to believe money was the most important measure, the one thing that matters on a personal scorecard. I became wired to succeed, earn promotions and win awards. All in the pursuit of “more money,” money for the family, money for more stuff.

This pursuit came at a cost; pressure to produce personal results in a competitive environment doesn’t come without hard work, long hours and time away from the family.

We end up spending more time at work or thinking about work when we are out of the office. We sacrifice time with our families and time pursuing our passions. All that time working in a corporate environment causes you to conform; to become the corporate person somewhere along the way you lose the freedom to be the real you. We trade our true personality in exchange for economic security: a security which in today’s environment is not even guaranteed.

My relationship with money changed when I finally began to feel financially secure late in my career. My priorities changed and I was able to step back and realize that my career was only providing financial security, but little else.

I learned that the worst thing you can do is to spend time working at a job that does not provide fulfillment, all for a little more money. Living, maybe existing is a better word, causes you to lose yourself a little bit each day. You find yourself sitting at work, glancing now and then at your pension statement, trying to hang on for a retirement which if not planned gets you away from work, but still may not be fulfilling.  Sure, you can save a little more for a retirement, but you really have no idea how you will spend your time. The paradox is that for many of us our financial situation is at an all-time high, but the quality of life is at an all-time low.

I was lucky to be “retired” by the Corp.

In hindsight I was lucky to be “retired” by the corp.; it freed me to pursue what Maslow calls self-actualization. Continue Reading…

Retired Money: Equities in Retirement — you may need more than you think

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Contrary to what some may feel, equities in retirement is not an oxymoron. If you’re retired or almost so, you may be thinking it’s time to lighten up on your equity exposure.

The problem with rules of thumb is that some of them get quite dated and nowhere is this more relevant than in the maxim that a retiree’s fixed income exposure should equal their age. (So, the guideline goes, 60 year olds would be 40% in stocks and 90 year olds only 10% in them).

My latest MoneySense Retired Money column looks at this in some depth, via reviews of two books that tackle both the looming North American retirement crisis and this topic of how much equity retiree portfolios should hold. You can find the full article by clicking at the highlighted text: How to Boost Your Returns in Retirement.

As the piece notes, the single biggest fear retirees face is the prospect of outliving your money. Unfortunately, retiring in this second decade of the 21st century poses challenges for just about any healthy person who lacks an inflation-indexed employer-sponsored Defined Benefit (DB) pension plan. We’re living longer and interest rates are still mired near historic lows after nine long years.

The two books surveyed are Falling Short, by Charles Ellis, and Chris Cook’s Slash Your Retirement Risk. I might add that regular Hub contributor Adrian Mastracci twigged me to the Ellis book when he compared and contrasted it to my own co-authored book, Victory Lap Retirement. See Adrian’s review here: Two notable books to guide your “Retirement” journey. Continue Reading…

Always show up for a free lunch!

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By Heather Compton

Special to the Financial Independence Hub

Always show up for a free lunch!

That’s the tongue-in-cheek advice I give all “soon to retire” folks but, frankly, taking advantage of free lunches is key for every investor.

I use the term “free lunches” for all manner of benefits and it’s alarming to me how many people pass them by. Many employers offer employees matching contributions to Retirement Savings accounts that require the employees to pull out their own wallet too.

One major corporation I worked with gave all employees a contribution of 6% of their salary to the Defined Contribution Pension Plan.  The employer would contribute a further 4%, contingent upon the employee also contributing 4%. That’s a great free lunch! A shocking number of employees felt they couldn’t afford to participate:  they said they couldn’t meet all their other financial obligations without that 4% of salary. Actually, by making the 4% RRSP contribution they also earned a tax deduction, so the after-tax, out-of-pocket expense was even less.

Don’t overlook the daily Special

Many companies offer employees the convenience of group savings programs, even where there are no company-funded contributions. That too has value; the investment choices available in these plans often have significantly below market rate MERs (management expense ratios) and no account fees or cost to buy or sell. One company with which I am familiar has a savings plan offering a solid range of investment funds with MERs ranging from a low of 0.10% to a high of 0.58%.

Only a knowledgeable investor, capable of building a low cost ETF (exchange traded fund) portfolio, could match this low-cost option. If the contributions are made to a group RRSP, the employer can also add the convenience of reducing the tax paid at source. Since the contributions and investments are made regularly, often monthly, we can add the benefit of dollar cost averaging to the mix.

What other free lunches are often overlooked?

Continue Reading…