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.

Moshe Milevsky and Guardian Capital unveil a Modern Tontine in new Retirement solution

Posted By |
Moshe Milevsky

A revolutionary new approach to preserving portfolio longevity through a modern “Tontine” structure was unveiled Wednesday by Guardian Capital LP and famed author and finance professor Moshe Milevsky.

GuardPath™ Longevity Solutions, created in partnership between Guardian and Schulich School of Business finance professor Milevsky, is designed to address what Nobel Laureate Economist William Sharpe has described as the “nastiest, hardest problem in finance” 1

Announced in Toronto on September 7, a press release declares that the “ground-breaking step” aims to “solve the misalignment between human and portfolio longevity.” See also this story in Wednesday’s Globe & Mail.

Over the years, I have often interviewed Dr. Milevsky about Retirement, Longevity, Annuities and his unique take on how the ancient “Tontine” structure can help long-lived investors in their quest not to outlive their money. Milevsky has written 17 books, including his most recent one on this exact topic: How to Build a Modern Tontine. [See cover photo below.]

Back in 2015, I wrote two MoneySense Retired Money columns on tontines and Milevsky’s hopes that they would one day be incorporated by the financial industry. Part one is here and part two here. See also my 2021 column on another pioneering Canadian initiative in longevity insurance: Purpose Investment Inc.’s Longevity Pension Fund.

Addressing the biggest risks faced by Retirees

In the release, Milevsky describes the new offering as a “made-in-Canada” solution that addresses “the biggest risks facing retirees and are among the first of their kind globally. Based on hundreds of years of research and improvement and backed by Guardian Capital’s 60-year reputation for doing what’s right for Canadian investors, I am confident these solutions will revolutionize the retirement space.”

Milevsky’s latest book is on Modern Tontines

In an email to me Milevsky said: “You and I have talked (many times) about tontines as a possible solution for retirement income decumulation versus annuities. Until now it’s all been academic theory and published books, but I finally managed to convince a (Canadian) company to get behind the idea.”

In the news release, Guardian Capital Managing Director and Head of Canadian Retail Asset Management Barry Gordon said that “for too many years, Canadian retirees have feared outliving the nest egg they have worked so hard to create.” It has answered that concern by creating three solutions that aim to alleviate retirees’ greatest financial fears: The three solutions are described at the bottom of this blog.

With the number of persons aged 85 and older having doubled since 2001, and projections suggesting this number could triple by 2046,2 Guardian Capital says it “set out to create innovative solutions that this demographic could utilize when seeking a greater sense of financial security.”

Tontines leap from Pop Culture to 21st Century reality

Tontines were one of the most popular financial products for hundreds of years for individuals willing to trade off legacy for more income, Guardian says. Once in a  while the tontine shows up in popular culture, notably in the film The Wrong Box, where the plot revolves around a group of people hoping to be the last survivor in a tontine and therefore the recipient of a large payout.

“With our modern tontine, investors concerned about outliving their nest egg pool their assets and are entitled to their share of the pool as it winds up 20 years from now,” Gordon says, “Over that 20-year period, we seek to grow the invested capital as much as possible to maximize the longevity payout. Along the way, investors that redeem early or pass away leave a portion of their assets in the pool to the benefit of surviving unitholders, boosting the rate of return. All surviving unitholders in 20 years will participate in any growth in the tontine’s assets, generated from compound growth and the pooling of survivorship credits. This payout can be used to fund their later years of life as they see fit, and aims to ensure that investors don’t outlive their investment portfolio.” Continue Reading…

Fed Pivot turned into a Divot

Posted By |

 

By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It was a more than interesting week. Not much mattered until Jerome Powell (the U.S. Federal Reserve Chair) delivered comments on Friday. He came clean. Or at least he helped to reverse the delusion created by stock market enthusiasts that the Fed would ‘pivot’ and reverse course on the market-unfriendly series of rate hikes. Rates are going higher and they will stay higher. There will be some pain for consumers and business. Inflation must be crushed. They will do what it takes. The Fed pivot turned into a divot. The markets were not happy with the reality check.

In a Seeking Alpha article published just days before the Powell presser, Michael J Kramer of Cott Capital Management offered …

The futures, bond, and currency markets are already telling the world that there is no dovish pivot, and quite frankly, there probably never was a dovish pivot. The only market out there that hasn’t gotten the message appears to be the equity market.

If Powell can deliver a message that even a golden retriever (I own two goldens) can understand, then the equity markets’ day of reckoning will arrive in short order.

Also from Michael …

The futures knew it, bonds knew it, and the dollar knew it. Once again, the only market living on an alternate planet was equities …

Powell finally delivered a direct message

In his Jackson Hole speech, in the opening paragraph, he made it clear that his remarks would be shorter and the message would be more direct. That it was.

Very simply, rates still have further to rise, and once there, they will stay there for some time. In the following paragraphs, I have borrowed from Michael and others, I will avoid quotes for readability. My own commentary is in the mix.

Powell offered that reaching an estimate of the longer-run neutral rate is not a place to pause or stop. He said the June FOMC projections suggest rates would rise to just below 4% through the end of 2023 and that history warned against loosening policy too soon.

It’s evident that the Fed is aware of the mistakes made in the 1970s and 1980s with the stop-and-go monetary policy approach that led to even higher rates, and the Fed appears determined not to repeat those mistakes. There can be no 70’s show rerun.

Fed Chair Jay Powell said:

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.

Powell noted that fighting inflation will take a sustained period of below-trend growth and a softening labor market, which could bring pain to households, and are the costs of reducing inflation. In the third paragraph of his speech, it’s right there. The Fed is willing to sacrifice growth and face rising unemployment to bring inflation down. He is telling the market there will be no “pivot” anytime soon.

Inflation is driving the bus

The Fed chair said central banks need to move quickly, warning historical episodes of inflation have shown that delayed reactions from central banks tend to come with steeper job losses.

“Our aim is to avoid that outcome by acting with resolve now,” Powell said.

The following image is not a live video, but an example of the headlines that ‘spooked’ the markets.

Federal Reserve Chairman Jerome Powell on Friday said the central bank’s job on lowering inflation is not done, suggesting that the Fed will continue to aggressively raise interest rates to cool the economy.

Get the inflation-killing job done

“We will keep at it until we are confident the job is done,” Powell said in remarks delivered at the Fed’s annual conference in Jackson Hole, Wyoming.

“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” Powell said Friday.

The central bank has delivered four consecutive interest rate hikes over the last six months, moving in June and July to raise rates by 0.75%, the Fed’s largest moves since 1994. By raising borrowing costs, the Fed hopes to dampen demand by making home buying, business loans, and other types of credit more expensive. Continue Reading…

Which are better: Bonds or GICs?

Posted By |

By Mark and Joe

Special to the Financial Independence Hub

Even for seasoned investors, during times of market volatility, there is a tendency for investors to shift their mindset from capital growth to capital preservation.

So, for capital preservation, are bonds or GICs better? Which is better, when?

We’ll unpack that a bit in today’s post and offer our take on how we manage our portfolios, along with insights from clients too!

Bonds 101

What are bonds?

We’d like to think of bonds as an “IOU.”

Bonds are very similar in fact to GICs (Guaranteed Investment Certificates – more on that in a bit), in that governments or financial institutions issue them to raise funds from investors willing to lend in exchange for interest. However, a major difference between the two is that in most cases, bonds are publicly traded, meaning investors have liquidity even if their principal is locked for the bond’s tenure (length of time invested). As a result, bond investors are exposed to capital gains/losses as bond prices are affected by various factors such as equity market performance, the prevailing interest rate, foreign exchange rates, and other economic factors.

We can see this playing out right now. There is lots of talk about bond prices effectively going “nowhere” anytime soon with interest rates rising.

Interest rates reflect the cost of borrowing money. General lending and saving money practices amongst institutions and retail investors alike make the economy go round!

If the economy is growing quickly or if inflation is running hot, then our central bank (Bank of Canada) may increase interest rates. This triggers retail financial institutions to raise the rates at which they lend money, pushing up the cost of borrowing. When this happens, institutions may also raise their deposit rates, which makes the incentive to save money and keep savings intact more attractive for folks like us too.

Bond prices and interest rates as they relate to GICs

So, we have summarized that bond prices have an inverse relationship with interest rates.

Rates go up, bond prices come down.

Understanding and accepting interest rate risk is generally part of the game when you own bonds.

Bond pros and cons: 

1. Liquidity – bonds (bond ETFs in particular) offer investors liquidity as they are publicly traded, you can get your money back without paying hefty redemption penalties less any transaction costs typically.

2. Lending options – you’ll read below that GICs are only issued by financial institutions and government-backed entities (for a reason!), but bonds can be issued by even corporations. So, you have many options – a portfolio of bonds can include different issuers, with different maturities, with different ratings (i.e., quality of the bond issuer subject to default) which can help bond owners increase their returns.

3. Bonds have volatility – we believe bonds are not “as safe” as GICs since they are exposed to capital gains and losses; market factors mentioned above.

There is of course much more to any bond story but this primer is meant to draw a snappy comparison of which is better, when, below!

GICs 101

GICs, by nature of their very name, offer more stability given they are backed up by the Canadian government – so they can be considered a lower-risk, lower-reward fundraising tool.

Like bonds, interest rates offered by GICs can vary over different maturities, between institutions, but rates are generally higher over longer periods of investing time.

Guaranteed Investment Certificates (GICs) are considered lower-risk investments because the guaranteed part means you are guaranteed to get back the amount you invest — the principal — when your GIC matures.

Ideally then, you buy a GIC, hold it to maturity, and get your principal back AND interest as well. This is not unlike a saving account: except that your money is locked in to grow for a predetermined period of time. When the investment matures or reaches the end of that time period, you get your money back plus the agreed-upon amount of interest.

As long as you let your GIC mature, you are guaranteed that money. However, if you withdraw the funds earlier than the certificate contract allows, you will be penalized and may lose some or all of the interest.

Beyond the nuts and bolts of some GIC products, here are some considerations below.

GIC pros and cons:

1. Safety – while bonds (and bond ETFs in particular) offer investors potentially higher investment returns, because GICs are safer, they tend to deliver lower returns for the risks-taken; based on the guarantees provided. Your GIC is insured if you bought it at 1) any major Canadian bank – banks are members of the Canada Deposit Insurance Corporation (CDIC),or 2) a credit union or Caisse Populaire. (This means you will get your money back if the financial institution where you bought your GIC closes down, defaults or the institution is unable to pay you when the GIC matures. Coverage depends on the value and type of GIC you hold.

Click here to see some very important term coverage information on CDIC!

Bonds vs. GICs – Which is Better?

Now, the drumroll … bonds vs. GICs – which is better?

We believe bonds can be great for many investors.

The key reasons to own bonds, in our opinion, is as follows: Continue Reading…

Retired Money: All about the OAS boost at age 75 and implications of deferring OAS and CPP benefits

Posted By |

My latest MoneySense Retired Money column looks at a rare 10% boost of Old Age Security (OAS benefits) Ottawa recently confirmed for seniors aged 75. As you’ll see there are plenty of implications and points to consider for those who are younger and contemplating deferring OAS to 70, or indeed CPP.

You can find the full column by clicking on the highlighted headline here: Delaying CPP and OAS — Is it worth the Wait?

The National Institute for Aging (NIA) confirmed OAS payments for Canadians aged 75 or older will be hiked 10%: the first permanent increase in almost 50 years. The NIA’s Director of Financial Security Research, Bonnie-Jeanne MacDonald, and Associate Fellow Doug Chandler said in the release the best way for retirees to maximize this boost is to defer OAS benefits for as long as possible, either by working longer or by using their savings to fund the delay.

By now, most retirees are aware they can boost Canada Pension Plan (CPP) benefits by 42% by delaying the onset of benefits from age 65 to 70, or 0.7% for each month of deferral after 65.  What’s less well known is that a similar mechanism works for OAS. Unlike CPP, OAS is never available before age 65, but by delaying OAS benefits for 5 years to age 70, you can boost final payments by 36%, or 0.6% more for each month you delay benefits after 65, according to the NIA. Before the August increase at age 75, the NIA said average Canadians would “leave on the table” $10,000; but after factoring in the new increase, they would now lose out on $13,000 by taking OAS at 65.

MacDonald and Chandler noted there are three other reasons to postpone OAS benefits: Reduced clawbacks of the Guaranteed Income Supplement (GIS) after age 70; Better OAS benefits despite clawbacks for those with more retirement income: and Increasing residency requirements. On point one, it says lower-income seniors wishing to avoid GIS income-tested clawbacks could draw down on RRSP savings to defer and boost OAS benefits, thereby preserving GIS payments after 70. On point 2, those subject to OAS clawbacks may find the age 75 boost in combination with delaying benefits may increase benefits but not the clawback. And on point 3, waiting may mean more years of residency for those who have not lived their entire years in Canada: to qualify for OAS you need to have been a Canadian resident for at least 10 years after age 18, so the five extra years of waiting for benefits could add to the payout.

However, on the first point retired actuary and retirement expert Malcolm Hamilton says it’s true deferring OAS until 70 and drawing more from your RRIF to compensate, means your RRIF income after 70 will be smaller and OAS pension larger. “However, by not drawing OAS until 70, low-income seniors will forfeit the full GIS benefit before 70. This doesn’t look like a good plan to me.” Continue Reading…

Can you retire with a $500,000 RRSP?

Posted By |
Image Courtesy of Cashflows & Portfolios

By Mark and Joe

Special to the Financial Independence Hub

Many people feel you need to save a bundle for retirement, and that can be true, depending how much you intend to spend. So, can you retire with a $500,000 RRSP? Can you retire without any company pension plan?

Read on to learn more, including how in our latest case study we tell you it’s absolutely possible to retire with no company pension while relying on your personal savings.

Financial independence facts to remember

You may recall from previous case studies on our site while achieving financial independence (FI) is desired by many it may not be possible for most to achieve.

Realizing FI takes a plan, some multi-year discipline, and ideally one or both of the following:

  1. For every additional dollar you save, you can invest that money so it can grow your wealth faster, and/or,
  2. You can realize financial independence by consuming less.

Here at Cashflows & Portfolios, we suggest you optimize both options above: if you can.

Check out these previous, detailed case studies, to see if you fall into any of these retirement dreams:

Check out how Michelle, a 20-something software engineer, plans to retire by age 40, including how much she’ll need to save to accomplish that goal.

This couple plans to retire by age 50 by using their appreciated home equity.

Here is how much you need to save to retire at age 60 rather comfortably.

There are different roads to any retirement

Members of our site have already learned the powerful math behind any retirement plan:

The more you save, the faster you are likely to achieve your goal.

However, life is not a straight line. Everyone has a unique path to retirement. Twists and turns abound. Depending on the path you took in life, including what decisions you made, your retirement planning work could be vastly different than anyone else’s.

Can you retire with a $500,000 RRSP?

Not every person has a high savings rate. In fact, most don’t.

Not every person has a company pension plan to rely on either. In fact, increasingly, many don’t!

Our case study participant today was unable to have a high, sustained savings rate and he didn’t have any company pension plan to buy into either. Is he doomed for retirement? Will $500,000 saved inside his RRSPs in his 60s be enough (in addition to $100,000 in his TFSA)?

Let’s look at his case study.

In our profile today, is Tom.

Tom is aged 63 and wonders if he can retire with $500,000 invested inside his RRSP and $100,000 in his TFSA. Here are some snippets from his email to us:

Hi there,

I was hoping you can help since I know you perform some financial projections for clients … I was just wondering if you have any articles or would you know the answer to this question. I’m a single guy with a simple life. Let’s say I have only my RRSP (for the most part) to rely on for retirement beyond government benefits. I have almost $500,000 invested there. I have no non-registered account although my TFSA is maxed and now worth $100,0000. (I don’t want to use my TFSA for retirement spending right now, I consider it a big safety net as I get older so maybe you can help me run some math?) Anyhow, I am wondering if I could start taking money from my RRSP, and retire soon. Any money I don’t need for retirement, I would move in-kind into my TFSA. (I know from reading your site I cannot make a direct transfer from my RRSP to TFSA – thanks guys but I will take any excess cash I don’t spend and likely move it there. We’ll see.) I have very modest spending needs. I have no debt. I own my home in rural, small town Ontario.

What do you think?

I make decent money now, definitely not $100,000 per year but “enough” to meet my needs and to continue to invest inside my RRSP and TFSA for the next couple of years. 

Do I have enough to retire and spend about $3,000 per month well into my 80s and 90s?

Thanks very much!

Thank you Tom!

 

To help Tom out in the future, we shared some low-cost investment ideas for his TFSA and RRSP:

  1. Everything You Need to Know about TFSAs.
  2. Everything You Need to Know about RRSPs.

Here are the cash flow and investing assumptions for Tom beyond what he told us above. Continue Reading…