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.

Ten questions on Annuities – answered here!

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I tell ya…I get no respect.

That could be an old, popular Rodney Dangerfield tagline or it could be how annuities feel from time to time:  disrespected, unloved, and generally misunderstood.

Thankfully, I have someone here to help demystify annuities: to see if these products could be right for you or someone you know at some point.

Alexandra Macqueen is a fee-for-service financial planner, author and faculty member at the Schulich School of Business.  She has also been kind enough to share her expertise on my site, why you should consider pensionizing your nest egg at some point, along with countless other personal finance and investing sites.

Here are ten questions and ten answers about annuities – in plain language – in the hopes of helping you learn more and become better educated about what these financial products actually do.

1.) Alexandra, thanks for this!  Let’s get down to basics: what is an annuity?  

At the most basic level, an annuity is a contract under which you (the annuitant) provide a sum of money to an annuity issuer — a life insurance company — who, in exchange, provides you with monthly income for as long as you are alive, no matter how long that is.

Annuities come in many different “flavours” (indexed? deferred? joint? variable? prescribed?), but all of them incorporate this basic exchange: a sum provided to an insurance company for cash flow in your bank account over time.

2.) Why should older Canadians consider annuities? Who are they designed for?

While I would in no way argue that every Canadian should consider an annuity no matter their financial situation, the reasons that a retiree might consider incorporating an annuity into part of their retirement income strategies include:

  • If you are worried about living a long time, potentially outliving the funds from your portfolio, and want to ensure you have some cash flow that cannot “expire.”
  • If you are reluctant to leave all of your assets exposed to some form of investment market risk and would prefer to have income that’s protected from market-based fluctuations.
  • Depending on factors primarily including the age at which you purchase the annuities and the source of funds used for the purchase, if you are interested in cash flow that has a higher yield than products with similar guarantees (think Guaranteed Investment Certificates or GICs), while producing lower taxable income to preserve income-tested retirement benefits (think GIS)

3.) OK, so great benefits. Why do annuities get no respect? Do you think it’s because Canadians have a huge bias: they just think advisors or planners are (as a reader actually wrote on my site) just “circling the sky” on these products?

In my view Mark, there are many potential reasons why annuities “get no love.”

Think about the asset management industry today, compared to a few decades ago: we now have relatively abundant, cheap, and transparent DIY choices that allow individual investors to take their financial management directly into their own hands.

(Mark:  I’ve written about some of these choices here:

The best all-in-one Exchange Traded Funds (ETFs) to own.

Get help to train your investing brain with a low-cost robo advisor.)

In comparison, the annuity purchase cannot be a “self-serve” choice but must involve an advisor who holds a life insurance license. The product, too, is priced to take into account interest rates at the time of purchase, actuarial factors predicting how long someone might live, and how much the company wants to attract or forego that particular kind of annuity sale at the time you’re looking to buy.

None of these elements are transparently visible to the purchaser, or even the salesperson. In other words: although the concept is simple — the exchange of cash for income — the details are not.

Other factors include the reluctance of purchasers to hand over assets to the annuity issuer, the fact that many people really underestimate just how long they might live in retirement, and the belief that a portfolio invested in markets can “beat” the implied return of the annuity while potentially leaving estate value.

4.) So you touched on transparency: a bigger issue now and rightly so. What are the typical commissions paid to advisors for annuities they sell?  Is it a one-time commission (vs. a mutual fund that typically charges for every year the asset is owned)?

Commissions on annuities are paid once (at the time of purchase), with no ongoing trailers or commissions paid to the advisor: which may explain why these products are perhaps less popular than they might be.

Typically, the commission is “tiered” based on the size of the annuity purchase, and might be, for example, 2 or 3 percent on the initial $100,000 deposit, and scaling downwards as the deposit amount goes up.

Certainly, there are other insurance products, and other asset management transactions, that pay higher commissions than an annuity purchase.

5.) Are there certain annuities that more popular than others?  Which ones?  Why?

Without a doubt the most popular annuities in Canada are group annuities sold to fulfill pension plan obligations. Many people will have some portion of their retirement income provided from an annuity even if they never go out and buy an annuity directly. The size of the individual annuity market pales in comparison to the group annuity market. Continue Reading…

Retired Money: How the financial industry may use ALDAs and VLPAs as Longevity Insurance

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Finance professor Moshe Milevsky welcomes industry’s implementation of academic longevity insurance theories

My latest MoneySense Retired Money column looks at two longevity-related financial products that the industry may develop after the road to them was paved in the March 2019 federal budget. You can access the full column by clicking on the highlighted headline: A new kind of annuity designed to help Canadian retirees live well, for longer.

Once they are created by the industry, hopefully in the next year, these new products will introduce an element of what finance professor Moshe Milevsky has described as “tontine thinking.” In the most extreme example, a tontine — often depicted in fictional work like the film The Wrong Box — features a pool of money that ultimately goes to the person who outlives everyone else. In other words, everyone chips in some money and the person who outlives the rest gets most of the pot. As you can imagine at its most extreme, this can lead to some nefarious scenarios and skulduggery, which is why you occasionally see tontines dramatized in film, as in The Wrong Box, and also TV, as in at least one episode of the Agatha Christie TV adaption of Miss Marple.

Fortunately, the Budget doesn’t propose something quite as dramatic as classic tontines but get used to the following two acronyms if and when the insurance and pension industries start to develop them: ALDA is an acronym for Advanced Life Deferred Annuity.  As of 2020, ALDAs could become an investment option for those currently with money invested in registered plans like RRSPs or RRIFs,  Defined Contribution (DC) Registered Pension Plans and Pooled Registered Pension Plans (PRPPs).

The other type of annuity proposed are Variable Payment Life Annuities (VPLAs), for DC RPPs and PRPPs, which would pool investment risk in groups of at least 10 people. Not quite tontines in the classic academic sense but with the pooling of risk VPLAs certainly have an element of “tontine thinking.”

The budget says a VLPA “will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VLPA annuitants.” That means – unlike traditional Defined Benefit pensions – payments could fluctuate year over year.

There is precedent for pooled-risk DC pensions: The University of British Columbia’s faculty pension plan has run such an option for its DC plan members since 1967.

The budget said Ottawa will consult on potential changes to federal pension benefits legislation to accommodate VPLAs for federally regulated PRPPs and DC RPPs, and may need to amend provincial legislation. But it’s ALDAs that initially captured the attention of retirement experts, in part because of its ability to push off taxable minimum RRIF payments.

Up to $150,000 of registered funds can go into an ALDA

An ALDA lets you put up to 25% of qualified registered funds into the purchase of an annuity. The lifetime maximum is $150,000, indexed to inflation after 2020. Beyond that limit you are subject to a penalty tax of 1% per month on the excess portion. Continue Reading…

Why you need a Financial Planner

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By David Miller, CFP, RFP

Special to the Financial Independence Hub

When you start to look for help with your finances, whom do you ask first? Your best friend, parents, or a banker? By asking for a financial planner first, you are more likely to keep more of your money, save your time, and reduce your financial risks to help you reach your goals.

Here are my three favorite reasons you should look for and hire a financial planner:

  • Increased Financial Confidence
  • Accountability of Actions
  • Advancing Your Financial Literacy

Before I dive into these three reasons, I need to acknowledge that there seems to be some serious confusion for most of the Canadian public about who is advising them and what a financial planner is. Most people either don’t understand or don’t have enough information about who is advising them on their financial matters. This is an especially difficult task as everyone will have a slightly different experience with an advisor, given the advisor’s level of experience, education, skill, registration requirements, ethical requirements, personal biases, employment requirements and specialisation within the industry.

The complexity in the industry, with slight differences between advisor titles, is staggering. You may be meeting with a financial adviser, financial advisor, investment advisor, portfolio manager, investment counsellor, financial consultant and wealth coach among others. They may each do different things, target different niches, and/or specialize in different areas but may not actually provide financial planning services. Adding to the complexity is the lack of legislation for the term financial planner in all provinces except for Quebec.

“There is no legislated standard in place for financial planners or for those who offer financial planning services. In fact, in every Canadian province except Quebec, people may call themselves financial planners without having any credentials or qualifications whatsoever” – Financial Planning Standards Council.

I bring this up because I want to be clear that people looking for financial advice should look to hire and pay for the right type of financial advice. This is in the form of Certified Financial Planning professionals (CFP®) registered with the Financial Planning Standards Council (FPSC, now called FP Canada) and/or Registered Financial Planners (R.F.P.) from the Institute of Advanced Financial Planners (IAFP). These are the people I call financial planners with a nod to the IAFP for placing a higher level of ethical and planning experience requirements upon registrants.

I understand how valuable it can be when you meet the right advisor and get the right advice. Yet the value of financial planning has been described as incredibly difficult to quantify and you may see it as a secondary benefit and a waste of money or time. After all, there is great information on the internet, and your parents, best friend, banker etc. must know how best to help you, right?

Without further ado, here are my top reasons you should look to hire a financial planner instead:

  • Increased Confidence – Know your WHOLE picture

The statistics speak loudly:

Utilizing the FPSC’s most recent survey is maybe the best way to quantify how financial planning can increase levels of confidence. People feel much more on track with their financial affairs than compared to those without a financial plan.

Let’s look at an example of someone looking to plan their retirement. In preparation, a person must understand not only that they have enough money to last through their retirement but go through a laundry list of to-do items and complex decisions to make. Just to list a few: Continue Reading…

Almost half of North American Boomers may delay Retirement over Savings Concerns

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Almost half of North American’s young baby boomers would consider postponing retirement because of Savings concerns, a survey out Wednesday finds. Even so, more than half  surveyed had to retire early, often because of circumstances beyond their control.

Franklin Templeton’s 2019 Retirement Income Strategies and Expectations (RISE) survey found that 21 per cent of Canadian young baby boomers (ages 55 to 64) in pre-retirement have not saved anything for retirement. And in the United States, 17 per cent of young boomers are in a similar predicament.

13 to 15% expect to work until they die

As a result, 46% of young Canadian boomers and 48% of young American boomers are considering postponing retirement, with roughly 15% of Canadians and 13% of Americans expecting to work until the end of their life. Furthermore, 22% of self-employed Canadians don’t ever plan to retire.

However, things don’t always go as planned: 54% of young Canadian boomers and 60% of their American counterparts retired earlier than expected, compared to 32% and 37% of Canadian and American older boomers aged 65 to 73.

More Canadian young boomers retired due to circumstances beyond their control than Canadian older boomers (34% versus 20%, respectively). There was a slightly wider gap amongst Americans: more American young boomers retired due to circumstances beyond their control than American older boomers (33% vs 17%, respectively).

Boomers in different life situations after post 2009 bull run

“In 2009, when equity markets started to recover, many young boomers were moving up the career ladder; whereas older boomers were approaching retirement at the top of their earning years,” said Duane Green, president and CEO, Franklin Templeton Canada. “A decade later, after a long bull market run, young and older boomers are in different life situations once again. We see many older boomers benefitting from the transfer of wealth from their parents, yet the young boomers have had a challenging experience balancing more expensive lives – due to caring for elderly parents and still having financially dependent children – all while saving for that increasingly elusive retirement.”

Nearly a quarter (24%) of Canadian young boomers in pre-retirement currently support a dependent family member, compared to 9% of retired older boomers. The top three sacrifices young boomers made for dependents were: saving less money, cutting back personal spending and withdrawing from personal savings. They were least likely to use employer vacation time or take unpaid time off work for caregiving.

“With life expectancy increasing and retirement savings becoming ever more challenging, due to the high costs of living, we are seeing increased concern over having enough money for retirement across all generations,” said Matthew Williams, SVP, Franklin Templeton Canada. “Although it’s never too late to start saving, the best time to start contributing to retirement savings vehicles is when a person starts out in their career and may not have big financial commitments like a mortgage or childcare costs: and to find a way to maintain healthy savings habits as they age.”

Those employed by companies offering group RSP or pensions that allows employees to make contributions directly from their paycheque — and perhaps receiving a company match to their contributions — should fully take advantage of this and potential ‘free’ money, as it will assist their retirement nest egg in compounding over time, Williams said.

Americans more concerned about medical expenses in Retirement

Of those Canadians who plan to retire within five years, 86% expressed concerns about paying expenses in retirement. 27% of these Canadians nearing retirement ranked lifestyle as their top concern, compared to 17% of Americans.

Continue Reading…

Work Optional: Retire sooner to live your best life

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By Vicki Peuckert Cook

Special to the Financial Independence Hub

If you’ve spent any time reading about personal finance lately, you’ve likely heard about the “FIRE” movement. FIRE means Financial Independence – Retire Early.

Suze Orman got headlines by announcing she hated the FIRE movement (but she changed her position a few weeks later.) While Clark Howard “FIRE’d” before it ever became a popular thing to do. (If you think “retire early” doesn’t pertain to you, I strongly urge you to keep reading!)

Whether you agree with people who want to retire early in their 30s or 40s or not, it’s not hard to support the idea of becoming financially independent. Making work optional at some point so you can choose how to live your best life makes good sense.

Tanja Hester and her husband, Mark Bunje, left their careers behind to retire early (at ages 38 and 41) after reaching financial independence. Tanja’s new book, Work Optional – Retire Early the Non-Penny-Pinching Way teaches you how to get there too: no matter when you start or what age you’ll be when you leave work for the last time.

Retiring Is about your life, not just your money

It’s hard to think about retirement without focusing on money. After all, retiring without a solid financial plan – especially retiring early – is a recipe for disaster.

Tanja clearly explains what a bad idea it is to think you can just get back into the workforce if you run out of money in retirement. Her conservative advice is to Make Your Plan Bulletproof by diversifying your “magic money” sources.

Tanja doesn’t just tell you what to consider. She provides action steps and detailed information on ways to shore up your finances before quitting your day job for good.

What I really love about Work Optional is how Tanja embeds the importance of financial planning within retirement life planning. She redefines money as a tool to “help you live your best life as soon as possible.”

This helped me think about early retirement less as a race to get done with work but as a path to defining “living” according to your own terms.

Work Optional is organized in 3 main sections:

  • Determining what kind of life will thrill you
  • Creating a conservative financial plan to be able to live that life
  • Adapting to live your best “post-work” life

You can see that crafting and living your retirement dreams bookend the part of retirement planning most people really focus on: money. But Tanja doesn’t let you skip the tough questions you need to answer in order to transition to living the retirement you want.

She knows there is more to it than money, and she asks you to dig deep and engage with the most critical person in your retirement planning: YOU.

You have to do more than read

If you’re on this site, you probably listen to podcasts and read plenty of articles, blog posts, and books focused on personal finance. When I started on my own FIRE journey, I read everything I could find. Even with all of the information I had, I was still hesitant to act.

Did I really understand what I was reading? What if I missed something and made a mistake? Did new information come out that would help with my retirement planning? Continue Reading…