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.

Purpose Longevity Pension Fund game changer for Canadian retirees?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It’s possible that the game has been changed for the better, for Canadian retirees. Purpose Investments has launched a retirement funding mutual fund that is designed to deliver an annual payout at 6.15% annual. That is, the fund would pay out a minimum of 6.15% of your initial total fund value. For every $100,000 that you have invested, you would receive an annual payment $6,150. Introducing the Purpose Longevity® Pension Fund.

The Purpose Longevity Pension Fund offers the pension model, now available to the typical investor. Advisors will also be able to use the fund and will collect a modest trailing commission. For many Canadian retirees it will certainly be a game changer.

Income for life.

One of the greatest fears for retirees is running out of money. And most retirees don’t want to manage their own investments. They want to enjoy life, without financial worry. The Purpose Longevity Pension Fund will allow Canadians to top up their Canada Pension Plan and Old Age Security payments. Retirees may have other private pensions and other assets within the mix. The fund will allow a retiree to pensionize a large percentage of their liquid assets. They approach would remove much of the stock and bond market (volatility) risk.

And more importantly perhaps, it would remove the risk of investors messing up their retirement portfolio (and retirement funding) by way of bad behaviour.

Related post: Pensionize your nest egg with annuities: your super bonds.

The Purpose fund sits between the Vanguard VRIF ETF retirement funding solution and the traditional annuities. The Vanguard ETF is designed to pay out at a 4% rate of the portfolio value, adjusted each year.

An annual 6.15% payment (at age 65) is a big step up the retirement funding ladder.

When a retiree manages their own investment portfolio they will often use the 4% rule as a benchmark for the level that the portfolio can safely deliver retirement income, including an annual inflation adjustment. On Boomer and Echo I had offered …

The 4% rule. Is there a new normal for Canadian Retirees?

Everything changes in the decumulation stage.

Life changes and priorities change when we switch to the retirement or decumulation stage. Retirees just want to get paid.

Purpose Investments Presentation

Canadian retirees are not necessarily well served by the financial institutions in the retirement stage.

Purpose Investments Presentation

The pension model for the masses.

How does a fund pay out at a 6.15% rate (and potentially to increase) while studies show that a balanced or conservative investment mix can only ‘safely’ pay out at a 4%-4.5% level? Once again it follows the model used by pension funds (public and private) around the world.

I asked Som Seif, CEO of Purpose Investments to deliver an explanation.

It is based on what they call Longevity Risk Pooling. The difference between the required return on the fund (net 3.5%) and the income paid to investors (6.15%+) is because when people buy, they get their income, but as some people redeem/pass away earlier, they leave behind in the pool their returns on their invested capital (ie they get their unpaid capital out upon death or redemption).  These returns left behind reduce the total return required to provide the income stream for all investors.

Som Seif

It is the pooling of funds by the collective group of investors that will hold the fund, that delivers the secret sauce. There is retirement funding strength in numbers.

This is called Longevity Risk Pooling (or Sharing).

And as per the above quote, the underlying fund holdings only have to deliver at an annual 3.5% rate of return for the Purpose Longevity Pension Fund to deliver on the 6.15% funding level. Here’s ‘the how’ …

If you put in $500,000. After a number of years you receive distributions of $200,000, but then you pass away.  Your estate would receive the unpaid capital of $300,000 ($500k-$200k). The return on the invested capital would stay in the pool for the benefit of all of the investors remaining.  This return would reduce the overall required return for everyone.

Som Seif

The approach as been back tested.

Morneau Shepell conducted extreme stress testing on the model, which included the use of their economic scenario generator (ESG) that produced over 2,000 different simulations of future paths of economies and financial markets.

Probability of success (i.e. not having to decrease the income payout):

  • Over a 25 year period: 91%
  • Over a 35 year period: 86%

Purpose Investments can reduce income levels to ensure that the assets are never depleted and that income payments can continue to unitholders for their lifetime.

Net, net, the payments could move higher or lower. The risk will be managed, while any benefits offered by the markets will be passed along to investors.

The fund series.

There will also be a D-series available for self-directed investors.

The game changers combo offering.

On MoneySense and when we put together the Best ETFs in Canada, we often refer to the one ticket asset allocation ETFs as game changers. For use in the accumulation stage (wealth building) Canadian investors can hold comprehensive all-in-one portfolio ETFs with fees in the range of 0.20%.

And now enter the Purpose Longevity Pension Fund that might turn out to be the next piece in the game changing investment landscape.

  • Accumulation: one ticket
  • Decumulation: personal pension mutual fund

I’ll continue to do more research and I’ll add to this post. And I would invite reader questions. What do you want to know about this new offering?

I’ll get you the answers and I’ll add the responses to this post.

Thanks for reading. We’ll see you in the comment section.

Support your portfolio and Cut The Crap Investing.

While I do not accept monies for feature blog posts please click here on the mission and ‘how I might get paid’ disclosures. Affiliate partnerships help me pay the bills for this site. That will allow me to keep this site free of ads and easy to read.

You will also earn a break on fees by way of many of those partnership links.

I also have partnerships with several of the leading Canadian Robo Advisors such as Justwealth, BMO Smartfolio ,Wealthsimple, Nest Wealth and Questwealth from Questrade.

Consider Justwealth for RESP accounts. That is THE option in Canada.

At Questrade, Canadians can buy ETFs for free.

I use and I’m a big fan of the no fee Tangerine Cash Back Credit Card. We make about $55 per month in cash back on everyday spending.

Make your cash work a lot harder at EQ Bank. RRSP and TFSA account savings rates are at 1.3%.

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Dale

Dale Roberts is the Chief Disruptor at cutthecrapinvesting.com. A former ad guy and investment advisor, Dale now helps Canadians say goodbye to paying some of the highest investment fees in the world. This blog originally appeared on Dale’s site June 1, 2021 and is republished on the Hub with his permission.

Fixed Income: Down but not Out

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Franklin Templeton Investments: Licensed from GettyImages

(Sponsor Content)

While many equity markets have performed well year to date, the last few months have not been as kind to fixed income investors. Last quarter, fixed income markets recorded some of the worst returns in 40 years as central banks and governments worldwide continued to rack up a mountain of debt in ongoing support of the global economy and consumers during the COVID-19 pandemic. But don’t despair; as Franklin Bissett fixed income portfolio manager Darcy Briggs points out in this Q&A, the market still offers value — if you know where to look.

 

Q: How would you describe the current environment for Canadian fixed income?

After seeing significant returns in Canadian fixed income last year, we expect more subdued performance in 2021. Given the year’s starting point of very low interest rates and tight credit spreads, we see corporate credit as offering the best risk-adjusted return opportunities in the current environment. As active, total return managers focused on generating income and capital gains, we know bond selection will remain important this year. Small interest rate moves can lead to significantly different outcomes for different fixed income sectors. Uncertainties remain high, and we are seeing a wide range of forecasts on how the balance of 2021 will unfold. Although interest rates have been up as much as 100 basis points so far this year, we think they may have overshot, as happens from time to time. We would not be surprised if they drifted lower later in the year. Realistically, we expect the path ahead to be a little messy.

Source: FactSet, Franklin Templeton

How so?

This recession/quasi-depression was prompted by a dramatic health crisis and the resulting government-mandated shutdown; it was not caused by normal business cycle dynamics. While fiscal and monetary policy have prevented a full-blown financial crisis, those tools have limited ability to solve the current recession. We believe it will end once the pandemic subsides and the economy fully opens, functioning in a more familiar pre-pandemic way. Vaccines are key to the pace of progress. Continue Reading…

Retired Money: How Bond ETF investors can minimize risk of rising rates

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My latest MoneySense Retired Money column has just been published: click on the highlighted text to retrieve the full column: Should investors even bother with Bonds any more?

In a nutshell, once again pundits are fretting that interest rates have been so low for so long, that they inevitably must soon begin to rise. And if and when they do, because of the inverse relationship between bond prices and interest rates, any rise in rates may result in  capital losses in the value of the underlying bonds.

In practice, this means choosing (or switching) to bond ETFs with shorter maturities: the risk rises with funds with a lot of bonds maturing five years or more into the future, although of course as long as rates stay as they are or fall, that can be a good thing.

As the column shows, typical aggregate bond ETFs (like ETF All-Star VAB) and equivalents from iShares have suffered losses in the first quarter of 2021. Shorter-term bond ETFs that hold mostly bonds maturing in under five years have been hit less hard. This is one reason why in the US Vanguard Group just unveiled a new Ultra Short Bond ETF that focuses on bonds maturing mostly in two years or less.

The short-term actively managed bond ETF is called the Vanguard Ultra Short Bond ETF. It sports the ticker symbol VUSB, and invests primarily in bonds maturing in zero to two years. It’s considered low-risk, with an MER of 0.10%.

Of course, if you do that (and bear the currency risk involved, at least until Vanguard Canada unveils a C$ version), you may find it less stressful to keep your short-term cash reserves in actual cash, or daily interest savings account, or 1-year or 2-year GICs. None of these pay much but at least they don’t generate red ink, at least in nominal terms. Continue Reading…

The Dividend Aristocrats fight back

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

The Dividend Aristocrats are S&P 500 companies that have increased their dividends each year, for at least 25 years running. That is an exclusive group. Companies that have increased their dividends for 50 years or more are dividend royalty – they are dividend kings. The Aristocrats have underperformed over the last year and more. You won’t find an Apple, or Amazon or Alphabet (Google) or Tesla in that index. That made it more than difficult to keep up with the market. But those high quality Aristocrats are fighting back as value takes over from growth in 2021. With few dramatic high flyers, that might be its greatest strength in 2021 and beyond.

There is a US listed ETF for the dividend aristocrats ProShares NOBL. Here’s an overview from their landing page.

Here’s my previous post on the US and Canadian Dividend Aristocrats.

Rising dividends and equal weight magic

The Dividend Aristocrats offer a very simple one-two punch. We have that meaningful dividend growth history and the equal weighting of the index constituents. That compensates for a few of the key weaknesses of the S&P 500 cap weighted index. That is the most replicated index on earth, of course. A cap weighted index will follow the momentum of the market as more investors flow into the most popular stocks.

That can create a bubble based on enthusiasm over fundamentals.

Yes, you’ll find those cap weighted ETFs at work in the ETF Portfolio page. The methodology can work wonderfully until it doesn’t, such as in the dot-com crash of the early 2000’s. US stock markets and Canadian stock markets were crushed thanks largely to the over concentration in very popular tech stocks. Most of the US tech stocks had no earnings or very poor earnings. Of course, Canada went over the ledge thanks to Nortel. You can throw in the odd JDS Uniphase and a few other names as well.

You have a choice

None of the those tech stocks would have qualified as a dividend aristocrat in the year 1999 or 2000. The index side stepped much of the carnage. The dividend aristocrats greatly outperformed the S&P 500 through the dot-com crash and well beyond. It is an investment approach that beats the market with less volatility.

The first column is year, then Aristocrats, S&P 500, and then differential.

Incredibly, we see the Aristocrats offer positive returns in 2000 and 2001 while the cap weighted S&P 500 is two years into its three year venture of delivering negative returns. That began the lost decade for US stocks.

Are we about to enter another lost decade?

Many or most market commentators will offer that US stocks are in a bubble, again. The PE ratios, CAPE ratio and Buffett indicator all place today’s US stock market in dot-com crash territory. Continue Reading…

How to generate retirement income

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By Mark Seed, My Own Advisor

Special to the Financial independence Hub

You could argue beyond the how much do I need to retire question, this need comes up next: how to generate retirement income.

Rightly so.

I mean, we all want to know how best to use our retirement incomes sources wisely. Those retirement incomes sources are necessary to help fulfill income needs, while being tax efficient; income to provide some luxuries now and them, or to potentially deliver generational wealth should that be your goal.

My retirement income plan and options

I’ve been thinking about my income plan, or at least my semi-retirement income plan, for some time now.

I captured a list of overlooked retirement income planning considerations here.

Yet I can appreciate not everyone writes about nor thinks about this stuff.

There are obvious ways to generate retirement income but I suspect some might not appeal to you for a few reasons!

Option #1 – Save more

I doubt most people will like this option but it’s probably necessary for many Canadians: you’re going to need to save more than you think to fund your retirement. This is especially true if you have no workplace pension of any kind to rely on and/or you haven’t assessed your spending needs. More money saved will help combat inflationary pressure, rising healthcare costs and longevity risk.  Which brings me to option #2.

Option #2 – Work longer

If you didn’t like option #1, you might not like this one! Working longer into your 60s or potentially to your 70s might be the reality for a good percentage of Gen X and Y.  Part of the reasons these cohorts will need to work longer is because many Boomers remain in the workforce so they can fund their retirement. Some Boomers are continuing to work because they enjoy it. Some are continuing to work because they absolutely have to.

Option #3 – Spend less

The 4% rule remains a decent rule of thumb – it tells us we should be “safe” to withdraw approximately 4% of our portfolio with a minimal chance of running out of money.

Using 4%, a retiree would need $1-million invested to produce a steady income of $40,000 a year. Spending less, will absolutely help portfolio longevity and give stocks in your portfolio a longer time frame to run.

Our initial retirement income plan has us leveraging a mix of income streams in semi-retirement:

  1. Part-time work – to remain mentally engaged – in our 50s.
  2. Taxable but tax-efficient dividend income.
  3. Strategic RRSP withdrawals.

I’m not quite “there” yet in terms of other incomes streams, including TFSA withdrawals and exactly when to take those, but I’m working through that.

Generating retirement income

When it comes to you, options abound. You might have similar income streams or other ideas altogether. Remember, personal finance is personal.

I’ve had the pleasure of working with a few advice-only planners on this site and I’m happy to bring back Steve Bridge, a CFP from Vancouver for his detailed thoughts on this subject. Steve works as an advice-only financial planner with Money Coaches Canada (no affiliation with My Own Advisor). You can find him on that site for his services and you can follow him often on Twitter like I do at @SteveMoneyCoach.

Steve, welcome back to chat about this important subject!

Always a pleasure Mark. I love what you do here and I follow your journey. Continue Reading…