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.

Q&A on VRIF: Vanguard’s new Retirement Income ETF Portfolio

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Vanguard Canada

Special to the Financial Independence Hub

Republished with permission of Vanguard Canada

Late last year we launched a new all-in-one ETF solution, VRIF, to complement our existing line up of popular asset allocation ETFs.

VRIF, or the Vanguard Retirement Income ETF Portfolio, provides steady and predictable income to help investors meet their monthly expenses. It is made up of eight underlying Canadian Vanguard ETFs and will make an annual payout (currently 4% of the portfolio) split across equal payments each month.

The product has generated interest from investors and advisors along with several industry observers helping it become one of our top selling ETFs over the past few months and generating $150 million in assets (as of February 8, 2021).

It has also led to some questions on how it works and what it hopes to achieve. I wanted to collect some of those common questions and provide a few answers about VRIF.

1) What makes VRIF different from other similar monthly income funds and ETFs?

VRIF is unique in a few different ways. It incorporates a total return approach, meaning the portfolio is constructed to ensure it can help meet the daily living expenses of investors. There is an annual payout (currently 4% of the portfolio) split across equal payments each month. This is appropriate for investors and retirees looking for regular income as well as helping RRIF account withdrawals. For example, if you hold $30,000 in VRIF at the start of the year, that equates to $100 a month, for $1,200 over the year.

You also get a fully diversified portfolio with a mix of stocks and bonds, global diversification and a low-cost management fee of 0.29%*, which is currently about one-third of other similar retirement income products across the industry.

Another advantage to VRIF is that investors can rely on Vanguard’s global investment experts to monitor and assess the portfolio to meet the return target, along with providing regular rebalancing to help simplify the monthly income component. It really is a single ticket solution for investors to access monthly income.

* The management fee is equal to the fee paid by the ETF to Vanguard Investments Canada Inc. and does not include applicable taxes or other fees and expenses of the ETF.

2) How can VRIF help retirees and investors looking for income?

Managing income in retirement is not an easy task. There are a lot of ETFs and mutual funds for building up your retirement savings but not many for people who are looking to use those savings for their retirement spending.

With 30% of Canada’s population being 55 or older, the need for income has never been greater among investors. VRIF gives you a regular consistent payout each month (currently 4% of the total portfolio) and readjusts it once per year. Each year we set a dollar amount and it’s the same for every month in that year. The outcome is a simple and low-cost investment option that can help people enjoy their retirement.

3) How does VRIF expect to achieve the annual payout for investors given the current low-yield environment and where does that payout come from?

Within VRIF, we use a well-diversified total return approach to achieve a tax-friendly annual payout, (currently 4% of the portfolio) split across equal payments each month, that includes income from the portfolio and capital appreciation. Continue Reading…

Bonds are back but what did they just say?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

Bonds are the adult in the room. And when they speak, we should probably hear them out. This week [late June] bonds went on a tear. What were bonds trying to say? They were listening to the ‘Fed Speak’ in the U.S. that left many confused. Of course, the Federal Reserve and the Federal Reserve Chairman set the overnight rates that affect bond markets and our borrowing costs. It’s an economic lever. Maybe the adults in the room are suggesting that inflation is not a threat? We’ll see deflation in the near future? Or maybe a recession is closer than we think?

Here’s a good barometer for the bond market and economic sentiment – long term U.S. treasuries.

They’ve had a good month (and more) and they had an explosive week. The index ETF was up about 3% over the last two days. Long term treasuries are known as some of the best stock market risk managers. They punch above their weight.

Must read: Bonds are the adult in the room.

Recently I suggested that the stock and bond markets are buying the transitory inflation argument.

And in my most recent MoneySense weekly I had a look at some of the economic data for Canada and the U.S., including that recent Fed Speak and reaction.

Perhaps the bond market is going well beyond saying ‘inflation is transitory’. Let’s have a listen to what a few experts say about this weeks stock and bond activity.

David Rosenberg says look out below.

In a recent Globe and Mail piece Mr. Rosenberg suggested that inflation jitters will turn into deflation fear by year end. (pay wall) Of course bonds like deflation. And that’s one reason why we hold bonds right? Even though almost no one thinks that we could enter a long period of economic contraction and deflation. From Mr. Rosenberg …

“When these temporary disturbances fall out of the data, people are going to be surprised at how low the readings are going to be on these official inflation statistics,” the famed Canadian economist said in an interview Friday.

“I think we’re going to go back to talking about disinflation and deflation [by] the end of the year.”

The boring balanced portfolio is having its way these days. Stocks for growth and bonds for ballast and no-growth scenarios. Readers will know that I am also a fan of covering off inflation as well, you’ll read about that in the new balanced portfolio.

Investing is like a box of chocolates.

To quote Forrest Gump, you just never know what you’re going to get. This past week gave us that big and important reminder. Who would have thought that bond investors would have a such a sweet week? I’m happy to hold long term treasuries and that TLT and the BMO Canadian dollar version in ZTL.

Mike Philbrick at ReSolve Asset Management offered via Twitter …

No one knows the future price of any asset class so diversification is incredibly important as the first line of defense.

And as an example, pick your poison of inflation or deflation or economic shocks of any variety. More from Mike …

Another great example, why making sure investors are always exposed to inflation shocks rather than trying to time it … Money and mindshare piled in recently but all the returns came months before that, when investors were not noticing.

Perhaps there is no real economic growth?

Perhaps the bond markets echo Lance Roberts (no relation), CIO and partner at RIA Advisors, with respect to what is real and sustainable economic growth?

The reason that rates are discounting the current “economic growth” story is that artificial stimulus does not create sustainable organic economic activity.

And on the inflation front from Lance, you can’t create real inflation from artificial growth. From that post …

Yes, we see that word “deflation” again.

Rethinking the 60/40 portfolio?

That has been a hot topic for quite some time given the low yield environment. Many suggest tweaking up your equity exposure to the 70% level or so, if you have the risk tolerance. That was certainly covered in this post on the Horizons one ticket ETFs. Those portfolios employ U.S. Treasuries that help dampen the volatility of increasing equity exposure. Continue Reading…

Financial knowledge of Canada’s retirement system isn’t improving, study shows

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Financial knowledge about the Canadian retirement system fell from 2020 to 2021, says the Retirement Savings Institute.

The financial literacy of average Canadians is still low when it comes to understanding our Retirement system, says a survey being released Tuesday. The third edition of the Retirement Savings Institute (RSI) surveyed 3,002 Canadians aged 35 to 54 and found the overall RSI index measuring knowledge of the retirement income system slipped from 38% in 2020 to 37% in 2021. This, it says, is “still showing a significant lack of knowledge among Canadians.”

The RSI Index is the share (stated as a percentage) of correct answers to  29 questions posed in the survey.

The best-understood subjects continue to be CPP/QPP and RRSPs/TFSAs. Canadians still find it tougher to understand employer sponsored pension plans and Old Age Security, where the average respondents “didn’t know” the answer to half the questions.

In a backgrounder, the RSI team at HEC Montreal [a business school] says the scientific literature in several countries has established a link between general financial literacy and preparation for Retirement. However, “the level  of general financial literacy among Canadians is fairly low, although comparable to what is observed elsewhere in industrialized countries.” It also finds knowlege about narrower topics like taxes to be “rather limited.”

Starting in 2018, the RSI started to measure on an annual basis the financial literacy of Canadians in their “years of strong asset accumulation in preparation for retirement.” Those younger than 35 tend to have “other concerns and financial priorities than retirement,” the RSI says.

Knowledge rises with education and income, and as retirement nears

Not surprisingly, the closer to Retirement age one is, the more knowledgeable of related financial matters we tend to become. The RSI score was 33.9% for the youngest in the survey aged 35 to 39, rising to 36.6% for the 40 to 44 cohort, then to 37.8% for the 45-49 group, and a high of 39.5% for those 50 to 54.

Also as one would expect, the more schooling the higher the score: those with high school or less had an RSI score of 31.5%, while those with college or equivalent scored 36.9%, and those with a Bachelor’s degree or higher scored on average 45.3%. Similarly, the higher the household income, the better knowledge. Thus, those with household income of $30,000 or less scored just 26.1%, compared to $60,000 to $90,000 families scoring 37.3% and at the highest, families making $120,000 or more scored 45.6%.

Equally unsurprising is the fact that higher earners are more knowledgeable about RRSPs and TFSAs, especially when it comes to contribution room and withdrawal rules. They are less knowledgeable about investment returns in those vehicles, and score a low 12.6% on penalties for over contributions and other rules related to taxes.

Many confused about Employer Pensions

Employer pension plans seems to be an issue. At all ages, Canadians found it difficult to know the difference between Defined Benefit (DB) and Defined Contribution (DC) pension plans. In particular, they tend to be confused about which one reduces longevity risk (DB) and which depends on returns generated by financial markets (DC). Low-income individuals are even less knowledgeable.

Workers who are contributing employer pension plans had significantly higher scores (41%) than those who were not enrolled in such plans (32.9%).

The older and richer understand CPP/QPP better

Also as you’d expect, older people and more well-off people understand the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) better. As the chart below illustrates, most Canadians are now well aware that taking early CPP/QPP benefits results in lower monthly benefits (shown in the “Penalty” bar), but there is still a lot of confusion about whether CPP/QPP recipients can collect benefits while still working (only 25% correctly answer this.)

Most Canadians know there is a penalty for taking CPP/QPP benefits early but there is much confusion about collecting while still working.

Older people also know OAS and GIS better. As the chart below shows, most people know you have to be at least 65 years old to receive OAS, but knowledge about technical matters like the OAS clawback, the Guaranteed Income Supplement to the OAS, and taxation of these benefits tends to be much scantier.

Basic OAS timing seems well understood but many are murky when it comes to clawbacks and eligibility and taxation of GIS benefits.

Mortgages well understood, bonds and debt not so much

When it comes to major financial products, Canadians are quite knowledgeable about compound interest, but as less so about debt doubling and quite ill-informed about Bonds, as the chart below indicates. ( Continue Reading…

63% neglected Retirement saving during Covid; study sees urgent need for Workplace pensions

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Over the course of the Covid pandemic the past year, almost two thirds of Canadians (63%) did not put aside anything for retirement, up from 58% last year, according to a study being released today.

That’s according to the third annual Canadian Retirement Survey from Healthcare of Ontario Pension Plan (HOOPP) and Abacus Data.

Not surprisingly, the survey also found a widespread belief that better access to workplace pensions is needed to avoid a retirement crisis.

The findings, based on an April 2021 survey of 2,500 Canadians, affirm there is a high level of anxiety about ability to save for retirement. Half (48%) said they are “very concerned” about not having enough money in retirement. That was more than the concern for one’s own physical health (44%), mental health (40%), debt load (31%) and job security (26%).  Only the daily cost of living was a greater concern than Retirement.

Steven McCormick, hoopp.com

“After more than a year of COVID-19, Canadians remain steadfast in their personal and societal concerns around retirement security,” said Steven McCormick, SVP, Plan Operations, HOOPP in a press release [pictured on right]. “As day-to-day financial pressures mount for some and ease for others, Canadians across the board are acutely aware of the importance, and challenge, of saving for retirement.”

While 46% of Canadians said they saved more money during COVID than they otherwise would have, more than half (52%) set aside nothing for retirement during the past year. Of those who said they saved less than usual, 72% saved nothing for retirement.

McCormick added: “HOOPP is proud to do its part by providing retirement security to healthcare workers, many of whom fall into groups that often don’t have access to pensions, such as women, part-time workers and younger Canadians. For our membership, the impacts of this pandemic will continue to be felt even after we emerge from the immediate crisis; but they can take some comfort in knowing their pension is secure.”

Covid disproportionately hurt finances of younger low-income groups

The COVID-19 pandemic harmed the finances of half of Canadians (52%) and did so disproportionately amongst younger and lower-income groups. Those aged 44 and younger are twice as likely to have had their finances greatly harmed (24%) than those 60+ (11%). Likewise, those earning less than $50,000 are twice as likely to have had their finances greatly harmed (25%) than those earning $100,000+ (12%). Continue Reading…

Retired Money: Has Purpose uncorked the next Retirement income game changer?

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Purpose Investments: www.retirewithlongevity.com/

My latest MoneySense Retired Money column has just been published: you can find the full version by clicking on this highlighted text: Is the Longevity Pension Fund a cure for Retirement Income Worries? 

The topic is last Tuesday’s announcement by Purpose Investments of its new Longevity Pension Fund (LPF). In the column retired actuary Malcolm Hamilton describes LPF as “partly variable annuity, part tontine and part Mutual Fund.”

We described tontines in this MoneySense piece three years ago. Milevsky wasn’t available for comment but his colleague Alexandra Macqueen does offer her insights in the column.

The initial publicity splash as far as I know came early last week with this column from the Globe & Mail’s Rob Carrick, and fellow MoneySense columnist Dale Roberts in his Cutthecrapinvesting blog: Canadian retirees get a massive raise thanks to the Purpose Longevity Fund. Dale kindly granted permission for that to be republished soon after on the Hub. There Roberts described the LPF as a game changer, a moniker the Canadian personal finance blogger community last used to describe Vanguard’s Asset Allocation ETFs. Also at the G&M, Ian McGugan filed Money for life: The pros and cons of the Purpose Longevity Pension Fund, which may be restricted to Globe subscribers.

A mix of variable annuity, tontine, mutual fund and ETFs

So what exactly is this mysterious vehicle? While technically a mutual fund, the underlying investments are in a mix of Purpose ETFs, and the overall mix is not unlike some of the more aggressive Asset Allocation ETFs or indeed Vanguard’s subsequent VRIF: Vanguard Retirement Income Portfolio. The latter “targets” (but like Purpose, does not guarantee) a 4% annual return.

The asset mix is a fairly aggressive 47% stocks, 38% fixed income and 15% alternative investments that include gold and a real assets fund, according to the Purpose brochure. The geographic mix is 25% Canada, 60% United States, 9% international and 6% Emerging Markets.

There are two main classes of fund: an Accumulation Class for those under 65 who are  still saving for retirement; and a Decumulation class for those 65 and older. There is a tax-free rollover from Accumulation to Decumulation class.

There are four Decumulation cohorts in three-year spans for those born 1945 to 1947, 1948 to 1950, 1951 to 1953 and 1954 to 1956. Depending on the class of fund (A or F),  management fees are either 1.1% or 0.6%. [Advisors may receive trailer commissions.] There will also be a D series for self-directed investors.

Initial distribution rates for purchases made in 2021 range from 5.65% to 6.15% for the youngest cohort, rising to 6.4 to 6.5% for the second youngest, 6.4% to 6.9% for the second oldest, and 6.9% to 7.4% for the oldest cohort.

Note that in the MoneySense column, Malcolm Hamilton provides the following caution about how to interpret those seemingly tantalizing 6% (or so) returns: “The 6.15% target distribution should not be confused with a 6.15% rate of return … The targeted return is approximately 3.5% net of fees. Consequently approximately 50% of the distribution is expected to be return of capital. People should not imagine that they are earning 6.15%; a 3.5% net return is quite attractive in this environment. Of course, there is no guarantee that you will earn the 3.5%.”

Full details of the LPF can be found in the MoneySense column and at the Purpose website.