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.

Should you take early CPP benefits or defer as long as possible?

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By Chris Nicola

Special to the Financial Independence Hub

One question that often comes up about Canada Pension Plan (CPP) benefits is whether to take it earlier or later. If you Google this, you’ll get different answers: some say take it early, others say take it later. It seems the experts don’t quite agree, so I wanted to do a thorough analysis myself.

Jim Yih explains that the break-even between taking CPP at 60 vs. 65 is at age 77. In other words, if I live past age 77 I’ll be better off my taking CPP at 65 rather than 60. Based on this he concludes that one should probably start taking CPP at 60, just to be sure. However, I’m still left wondering: “Am I more, or less, likely to live past age 77?”

Now, before I dive into the analysis, let me quickly explain how taking CPP earlier, or later, works. Assuming you will be age 60 after 2016, the CPP early and late withdrawal rules work like this:

  • If you take CPP before 65, you take a 7.2% penalty per year on your CPP payments (up to 36% at age 60)
  • For each year you wait after 65, you gain an 8.4% increase in your CPP payments (up to 42% at age 70)

On face value, 42% more does seem like a pretty compelling case for waiting, but, is it? The catch here is that, it will depend on how long you live. Will you live long enough to capitalize on the larger payments, if you wait to start taking CPP? The real question is: Are you, statistically speaking, going to receive more, or less, total CPP by waiting?

The hard working mathematicians at Statistics Canada have provided us with this handy table, which shows how long the average Canadian can expect to live until, given they have already reached a particular age. What I’m interested in, is what age the average person at age 60 can expect to live until.

Males maximize CPP at 68, women at 70

Currently, a man at age 60 can expect to live another 23 years (age 83), and a woman about 26 (age 86). As these are averages, they seem like reasonable numbers to use for our analysis, and age 60 is the earliest point at which we are able to consider taking CPP.

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Retired Money: How to boost retirement income by 50%

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PUR Investing’s Mark Yamada

My latest MoneySense Retired Money column looks at an academic paper written by two Canadian investment pros, which explains how retirees can boost retirement income by as much as 50%. You can find it by clicking on the highlighted headline here: How to boost your retirement income by 50%.

In the recent Fall issue of the Journal of Retirement, PUR Investing Inc. president and CEO Mark Yamada and colleague Ioulia Tretiakova, the firm’s director of quantitative strategies, published a paper titled “Autonomous Portfolio: A Decumulation Investment Strategy That Will Get You There.” Click here for a summary.

Yamada and Tretiakova observe that the combination of rising life expectancy, minuscule interest rates and declining availability of employer-sponsored Defined Benefit pension plans is making retirement an anxious proposition, especially for the Baby Boom generation that is even now starting to storm the barricades of Retirement: 10,000 Baby Boomers retire every day in the United States, and roughly 1,000 a day in Canada.

Little wonder that one study (Allianz 2010) found 61% of those aged between 45 and 75 were more afraid of running out of money than of dying! Sure, you can decide to work a little longer, which lets you save more and cuts down the years you’ll need to withdraw an income, but there’s a limit to how long you can work (or find willing employers or clients). Ultimately, health and time are not on your side!

The full article describes Yamada’s Decumulation Investment Strategy, which is designed to let retirees better manage both retirement income and the probability of ruin.

Dynamic Constant Risk & Spending Rules

Unfortunately, the investment industry relies on historical risk and return data to project future returns, somewhat like navigating a car by peering through its rear-view mirror. Yamada aims to keep portfolio risk constant by reducing portfolio risk when market volatility rises and to increase portfolio risk when volatility falls (hence the term DCR, which stands for Dynamic Constant Risk). Continue Reading…

CPP will be there for future generations, CPPIB head reassures Advocis

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CPPIB president and CEO Mark Machin

My latest Financial Post blog looks at the misplaced perception that the Canada Pension Plan (CPP) might not be there for future generations. Click on the headline to retrieve the full article: No reason to fear CPP’s stability, CEO Machin says, but people do it anyway.

Mark Machin is president and CEO of the Canada Pension Plan Investment Board (CPPIB.)  Speaking Tuesday to financial advisors attending Advocis Symposium 2017 in Toronto, he said “unlike virtually every other industrial country in the world,” Canada “has solved its national pension solvency issues.”

While you could argue that even America’s Social Security system is not solid for the next generation of American retirees,  the CPP is on a solid actuarial footing. Canada’s chief actuary says CPP is sustainable over 75 years, assuming a 3.9% real [after-inflation] rate of return: CPPIB’s 10-year annualized real rate of return is 5.3%.

Despite this, many Canadians — and perhaps some of their advisors — continue to profess their belief that the CPP won’t be around for them by the time they retire. 64% believe either that CPP will be out of money by the time they retire, or don’t know whether it will be there to pay them in retirement, Machin told Advocis.

Half of retirees greatly rely on CPP

However, in practice, Canadians tend to have more faith in the CPP than they claim: 42% of working-age Canadians expect to rely on the CPP when they retire (up from just 13% 15 years ago). In 2016, more than half of Canadians who are actually receiving CPP said they rely “to a great extent” upon it.

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How Group Annuities can help employers protect Defined Benefit pensions

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Source: Mercer Pension Health Index published October 2, 2017

By Brent Simmons, Sun Life Financial

Special to the Financial Independence Hub

Recently, employees and retirees of Sears were stunned to learn they may not receive all of their defined benefit (DB) pension when it declared bankruptcy. They learned their pension plan was underfunded and the company had requested that it be allowed to stop making the contributions required by Ontario laws. The plight of Sears employees and retirees has left many Canadians wondering if their DB pension plan is healthy and if their DB pension is safe.

The pension challenge

With a DB pension plan, a company promises their employees a pension for life and is responsible for paying the pension: whatever the cost ends up being. The problem is that low interest rates and choppy equity markets have made the funding level of many pension plans look like a roller roaster ride. This can be seen in the chart at the top of this blog.

Another challenge facing pension plans is that Canadians are living longer, meaning that pensions need to be paid for a longer time. A common rule of thumb is that one year of additional life expectancy at age 65 can increase the cost of the pension plan by 3% to 4%.

In a tough economy, the need to contribute to a pension plan can often come at a time when a company’s core business is also facing financial difficulties. If a company becomes bankrupt, then the company likely won’t be able to pay the contributions owed to the pension plan and employees may indeed face a shortfall in its pensions.

How Group Annuities protect their employees’ pensions 

The good news is that a growing number of Canadian companies are taking steps to protect their employees’ pensions. They are buying group annuities to transfer the financial risk of their pension plans to insurance companies, which are subject to strict regulations and must have funds on hand at all times to pay promised pensions. With a group annuity, an insurer assumes responsibility for providing the pensions to a company’s retirees in exchange for a fee, and the retirees continue to receive their promised pension.

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“I’m nearing Retirement and the stock market is at an all-time high. What should I do?”

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On October 19 Fortune published an article with the headline:

“30 Years after Black Monday, the Dow Hits an All-Time High”. 

The article goes on to speculate:

“only time will tell if we have another crash ahead of us. But in the meantime, investors seem to think that skepticism and caution may be just what we need to avoid one.”

Connecting the all-time high to the Black Monday crash from over 30 years ago smacks of the kind of fear-driven nonsense that characterizes much of financial markets journalism these days.  The article raises the temperature further by pointing out that:

“this marks the fourth thousand-point milestone for the Dow this year, painting a very different picture than what was seen in 1987.  According to the Wall Street Journal, the Dow had never before hit more than two of these milestones in a year.”

Transforming meaningless data points into blood-pressure-raising insights is a coveted skill for both market journalists and stock market analysts alike.  After all it’s their jobs to get people to act: stock analysts to compel trades, journalists to direct readers/viewers to the skilled money managers that advertise in their pages or on their programs.

I’d be a poor headline writer.  The first one I came up with, “Dow Hits an All-Time High more than 500 Times Since 1987 Crash” wouldn’t inspire much fear or anything else.  The fact is that markets go up most of the time as is clearly displayed in the index data series shown at the top of this blog,  courtesy of Dimensional Fund Advisors. Continue Reading…