Apart from the fact interest rates are now closer to 5% than zero, my wife and I are approaching the time when our RRSPs must be collapsed, converted to RRIFs, or fully or partly annuitized. That of course is required by the end of the year you turn 71.
One financial blogger and financial planner was ahead of the curve on rates and annuities. A year ago, on his Boomer & Echo blog, Robb Engen made the case for annuities just as interest rates were starting to rise. See Using annuities to create your own personal pension in Retirement. “Annuities fell out of favour (if they ever were in favour) when interest rates plummeted over the past 10-15 years,” he wrote, “But with interest rates on the rise, annuities are certainly worth another look.”
Engen’s case for annuities revolves around how they minimize longevity risk: the fear many retirees have that they’ll outlive their money. “An annuity provides a predictable income stream for life – much like how a defined benefit pension, CPP, and OAS pays benefits for as long as you live. Nothing protects you from longevity risk quite like having a guaranteed income that’s paid for life.”
Those who lack an employer-sponsored Defined Benefit pension plan and therefore have hefty RRSPs are particular candidates for annuitization. Yes, it’s true that most Canadians will have some inflation-indexed annuities in the form of the Canada Pension Plan (CPP) and Old Age Security (OAS) but some may feel comfortable transferring a bit of stock-market and interest-rate risk from their own shoulders to that of the insurance companies that offer annuities.
With respect to the interest rate rises of the past year and what it means for annuities, “I agree that the timing is ripe for those approaching retirement,” says Rona Birenbaum, founder of Toronto-based Caring for Clients, a financial planning firm that includes annuities in its recommendations.
Birenbaum – who is working to help our own family take a partial plunge to annuitization – suggested looking first to non-registered money that could be earmarked for an annuity, as it’s very tax efficient. Alterntively, “using RRSP assets makes sense providing the lack of liquidity doesn’t constrain future needs.”
Moshe Milevsky a fan of “slow partial” annuitization
Famed finance expert Moshe Milevsky, who has authored several books on retirement and annuities – notably Pensionize Your Nest Egg, coauthored with Alexandra Macqueen — told me in an email that “I will say that I have grown to become a fan of ‘slow partial’ as opposed to ‘rapid full’ annuitization, which helps smooth out the interest rate risk and is even more valuable from a behavioral psychological perspective.” Continue Reading…
Today’s economic and job-growth landscape might have you turning to investing as a prominent option.
It takes patience and effort, but anyone can save up enough through intelligent investments.
How do you begin the Investment Process?
As of 2023, the average American makes around US$57,000 annually, which is lower for minority groups. Even if you’re careful with your spending, becoming financially independent with that salary can take a long time.
The average person from the United States only has about $5,000 in savings. Before beginning the process, you must consider how much money you can invest. The ultimate goal is financial independence [aka “Findependence” on this site], but getting there can take a while. Only put in what you’re willing to lose because things might not pan out as expected.
The formula for Findependence takes your yearly spending and divides it by your safe withdrawal rate to calculate your goal savings figure. Then, it subtracts the amount you’ve already saved and divides that amount by how much you can save each year. It’s only an estimation, but it can help you know how much your investments need to make.
What Investments should you Consider?
There are plenty of investment types. The stable ones often have lower returns and you usually need to take some risk to see a high reward quickly.
1.) Real Estate Investment Trust
A real estate investment trust (REIT) receives money from investors to purchase and manage property. Most generate revenue through rental income and pay dividends in return for the initial payment you made. It’s similar to owning by yourself, but you pool funds for the purchase and let someone else take care of the tenants. There are also other REIT types, so you have more options than rental properties.
2.) Stocks
The stock market usually requires more attention to detail because you must keep up with it. Anything from an upcoming brand deal to an overseas political event can affect this investment type. You should frequently check the stocks you hold and the businesses they belong to so you can quickly respond to changes.
The Canadian stock market differs from the United States version. Firstly, you need a brokerage account. Most brokerages charge about $5 to $10 per trade, with average commission fees of $6.95. It might seem minor, but paying to invest or shift your stocks around puts you at a loss before you begin. The flat rate cut you must pay can also make investing smaller amounts challenging because it takes a higher percentage the less you put in. Continue Reading…
Markets are hesitant, but large-cap tech has been resilient. Learn why large-cap technology with an income strategy can help investors now.
By James Learmonth, Senior Portfolio Manager, Harvest ETFs
(Sponsor Content)
After recovering from some of their 2022 shocks early this year, markets have been trepidatious through most of 2023. That recovery and volatility story, on paper, looks broad based. Between January and mid-May, the S&P 500 is up around 8-9%. The S&P 500 Information Technology index, however, is up over 25% in the same rough time period. That outperformance skews even higher when we isolate some of the largest names in the technology sector.
So while overall market performance this year has been steady, turning choppier since the US banking crisis began in March, large-cap tech leaders are doing what they tend to do: lead.
In a macro environment of market uncertainty, high inflation and tech outperformance, one strategy can give investors exposure to large-cap technology companies, while providing income and ballast against volatility.
Why Large-cap Tech has been a leader
To understand how a tech income strategy can help investors, it’s worthwhile to unpack what has made technology a leading sector so far in 2023.
Q1 earnings season for tech shed some light on the sector’s outperformance. Part of that performance is due to a more broadly positive market sentiment in 2023, compared to 2022, in addition to some recovery following the sector’s struggles last year. Notable, however, is the positive reception large-cap companies have received for their artificial intelligence (AI) strategies.
AI has been the hot new topic this year, and large-cap tech companies have been quick to capitalize on the rapid pace of innovation in this space. Whether they are innovating their own AI tech, or applying AI to new areas these companies are creating serious value for shareholders with this technology.
It’s worth emphasizing the dominance of large-caps in this moment, companies like Meta, Apple, and Microsoft. In recent history, major tech leaps have been associated with ‘disruption’ of traditional larger players. So far in the rise of AI we’ve seen the largest companies leading, demonstrating their value as innovators and appliers of innovation.
Why Volatility is persisting in the broader market
Despite all the positivity in large-cap technology, broad markets have been choppy this year. Most of their recovery took place in the first months of 2023, and since the onset of a US banking crisis in March market performance has been choppy up and down, aggregating out flat.
Macro forces are largely to blame. The banking crisis highlighted the ongoing impacts of rapid rate hikes by central bankers starting last year. Even as that hiking period seems to be ending, the consequences of those raised rates will be felt over the next several months. More recently, fears about the US debt ceiling have troubled markets while geopolitics continues to impact sentiment. Continue Reading…
In his role as head of research at Merrill Lynch, Bob Farrell established a reputation as one of the leading market analysts on Wall Street. In his famous “10 Market Rules to Remember,” Farrell summarized his insights on market tendencies.
One of Farrell’s rules states, “When all the experts and forecasts agree — something else is going to happen,” which embodies the essence of contrarianism.
In this month’s missive, I explore the roots and causal factors underlying Farrell’s warning, drawing on historical examples. I also illustrate the potential benefits and pitfalls of going against the crowd. Additionally, I demonstrate that market sentiment is currently approaching levels that have historically preceded broad market declines. Lastly, I suggest that there are specific areas where investors should consider trimming exposure, realizing gains, and paying the taxman.
There is no shortage of historical examples of “sure things” ending badly. In the late 1990s, following two decades of above-average returns, both institutional investors and consultants broadly embraced the dangerous consensus that future stock market returns would be about 11%. Dissenters and naysayers were few and far between.
The basis for these forecasts was the extrapolation of recent results. Stocks had been delivering average annualized returns of 11%, therefore it was assumed they would do so going forward – simple. Few investors contemplated the possibility that the past 15 years were anomalous from a longer-term perspective. More importantly, there was little concern that an extended period of above-average returns might have been borrowed from future returns by pushing up valuations to unsustainable levels.
The sad ending to this ebullience was the first three-year decline in equities since 1930. For the seven years ending March 31, 2007, following the market’s peak in early 2000, the annualized return of the S&P 500 was 0.9%. Importantly, these subpar returns encompassed a bitter and painful peak-trough loss of about 50%.
A similar occurrence of widespread adulation ending badly occurred only a half-decade later in 2005, when everyone “knew” residential real estate was a “surefire” way to amass wealth. Zealots justified unsustainable values with oft-cited mantras such as “They’re not making any more land,” “You can live in it,” etc. This blind optimism pushed real estate prices to unsustainable levels which all but guaranteed the subsequent collapse and some painful experiences for the “it can only go up” crowd.
Sorry, Beatles – All You Need is NOT Love
More often than not, what is obvious to the masses is wrong. There are valid explanations, both financial and behavioral, that cause the things which everyone believes to be true to turn out to be untrue.
In July 1967, the Beatles released their famous single All You Need Is Love. With all due respect to John, Paul, George, and Ringo, nothing could be further from the truth in the world of investing. Specifically, the more popular a particular investment becomes, the less its profit potential, if for no other reason than if everyone likes something, such adulation is likely to be reflected in its price.
In what is referred to as the bandwagon effect, investors often become enthusiastic about a particular investment or asset class after it has already produced strong returns. Believing that past outperformance is a sign of strong future returns, the herd then hops en masse on the proverbial bandwagon. This widespread fervor then causes prices to overshoot any rational approximation of value, thereby setting the stage for inevitable disappointment.
In the world of investing, “everyone knows” should come with a “buyer beware” warning. Investments that are heralded as sure things are bound to be fairly priced at best and often become dangerously overvalued. Great opportunities lead to great prices, which by definition means their greatness has been paid for in full, stripping them of their greatness. Conversely, it’s only when people disagree that opportunities to achieve above-average returns exist.
Risk: Reality vs. Perception
Managing risk is at least as important as (and inextricable from) achieving decent returns. Not only do irrational sentiment and expectations result in poor returns, but also give rise to elevated risk. Risk evolves in the same paradoxical manner as returns. As an asset follows the journey from normal to over-owned and overpriced, not only does its potential return deteriorate, but its risk increases.
When everybody becomes convinced that something will produce spectacular returns, then by extension they also believe that it involves little or no risk. This perception often leads investors to bid it up to the point where it becomes excessively risky. In contrast, when broadly negative opinion drives all the optimism out of an asset’s price, its risk profile becomes relatively small. Put another way, investment risk tends to reside most where it is least perceived, and vice versa.
In the world of investments, Bob Farrell trumps the Fab Four. Good investments are generally associated with skepticism, indifference, and even neglect, which sets the stage for high returns with lower risk. Inversely, widespread acceptance and adulation sow the seeds of high-risk and poor returns.
No Good Deed shall go Unpunished
As is the case with many aspects of markets, both timing and patience play an important role in contrarian investing.
Investment trends regularly go to extremes. It is this very tendency that results in calamities and opportunities. Unfortunately, life for managers is not as simple as buying cheap assets and selling their overvalued counterparts. As John Maynard Keynes stated, “The market can remain irrational longer than you can remain solvent.”
Not only can overvalued assets remain stubbornly so for extended periods of time but can become even more overvalued before they ultimately come back down to earth. By the same token, undervalued assets can remain cheap and become even cheaper before any payoff materializes. Sentiment can be a self-fulfilling prophecy for an indeterminable amount of time before reversing, turning previously favored investments into assets non grata, and the subjects of yesterday’s scorn into tomorrow’s darlings. Continue Reading…
The full report includes three other graphs focused on the gap between retirees and pre-retirees, each of which includes some important discoveries. For brevity, the main findings for each topic are summarized below:
Things That People Miss About Their Career
A surprisingly large 62% of retirees miss the Social Interaction from work, whereas only 29% of pre-retirees expect that to be an issue. With a 33% gap, this was one of the largest retirement blind spots discovered by the survey.
The other two big blind spots related to what you’ll miss from your career include missingMental Stimulation (38% retirees vs. 21% pre-retirees) and a Sense of Identity (31% vs. 22%)
FRITZ: I’ve written extensively on the many non-financial benefits we receive from work, and yet it’s something that most pre-retirees continue to underestimate. The most successful retirees discover ways to replace the non-financial benefits they once received from work, such as social interaction, mental stimulation, and a sense of identity highlighted by this study.
ERIC: I see this all the time among my clients who are still working. At this stage in their lives, they primarily associate their jobs with a paycheck and bonus. Their eyes are focused on the prize money at the finish line. They fail to see the psychological income that does not show up on their paystubs in the form of intellectual stimulation, purpose and meaning, and the most ignored component of all, social interaction. I can’t put a number on how much of your work paycheck comes from psychological income, but in my experience it’s a significant amount that until you retire you are probably seriously under-estimating. Most people assume that the primary challenge of retirement planning is financial when, for most people, the real challenge is replacing the psychological benefits from their work days with new activities that provide meaning and purpose as well as social interaction.
Challenges of The Retirement Transition
The highest response rate for transition challenges was finding the right Balance of Structure, with 39% of retirees citing that as a challenge. Fortunately, it appears that many pre-retirees also recognize this will be a challenge, with 45% citing it as a concern.
In other areas, pre-retirees are also more concerned with the challenges than appear to be warranted by the actual experience of retirees. In particular, pre-retirees responded with a higher % of concern than retirees for each of the following categories:
Anxiety Over Future (30% pre- vs. 23% post-retirement)
Meaning/Purpose (33% pre- vs. 23% post-retirement
Outdated Identity (27% pre- vs. 20% post-retirement
Mental Stimulation (30% pre- vs. 18% post-retirement
Finding Happiness (23% pre- vs. 18% post-retirement
The Retirement Transition Isn’t As Smooth As Expected
A concerning 52% of pre-retirees “mostly agree” that the retirement transition will be smooth, whereas only 32% of retirees feel the same. This 20% gap is a warning to all pre-retirees and is further strengthened by the 26% of retirees who responded “mostly or strongly disagree” (vs. only 5% of pre-retirees). The reality is that transitioning into retirement is more challenging than most folks expect. A good takeaway for pre-retirees is to expect some turbulence during the transition. Ignore this retirement blind spot at your own risk.
FRITZ: It’s interesting to study the above results. While retirees tend to have better scores than pre-retirees on specific challenges, a much higher percentage of retirees report some difficulty in the transition compared to the expectation of pre-retirees. In fact, only 51% of retirees Agree/Strongly Agree that the transition was smooth, compared to 70% of pre-retirees who expect it will go smoothly.
ERIC: I think that most people in the planning phase only think of the positives of life in retirement. They seriously underestimate how big of a transition retirement can be. In fact, other industry surveys show this disconnect between expectations and reality. The greatest source of disconnect usually happens after the “honeymoon” period wears out. That typically happens within the first two years of retirement. I call this the “messy middle”. Many people associate retirement with a new beginning without ever acknowledging the ending of our prior stage in life or recognizing that all transitions in life usually involve a period of introspection and uncertainty before finding the necessary clarity and direction to move forward. Only a few of us skip out on the “messy middle.” I think it’s best when we plan for some turbulence ahead so that when we are shaken out of our comfort zone we’re neither surprised nor paralyzed from making the required adjustments. I like to remind my clients that a plan is just a guide meant to be revised as new data comes in. Keep iterating forward!
V. Which Components Lead To A Good Life in Retirement?
The final section of the survey was, in hindsight, a bit of “Motherhood and Apple Pie.” What does it take to lead a good life? Ask anyone, and you’ll likely see similar responses to what was revealed in the survey. In the survey, you’ll see we asked both pre- and post-retirees to rank these components. Results were similar between both groups, so for this summary, we’ll simply rank the components identified by those already retired, in descending order:
Components Rated as Very Important
Healthy Living (77%)
Time Management (68%)
Financial Plan (53%)
Relationships (52%)
Purpose/Meaning (41%)
Self-Identity (27%)
VI. Conclusion
We thank the 1,734 of you who participated in this joint study and hope all of you have found the results to be useful. We trust the findings on retirement blind spots will be helpful for those who are planning their retirements in the coming years. To reiterate the key blind spots, below is the conclusion of the key points from the Full Study write-up:
Major Retirement Blind Spots
You’ll miss more than just the paycheck when you retire. You’ll miss the mental
stimulation and social interaction associated with work. Start now cultivating new social
connections and finding new sources of mental stimulation to replace the psychological
benefits of work.
It will take you longer to shed your work identity than you expect. This will be primarily a
challenge in your early days in retirement. Don’t hang on to an outdated image of who
you were in the past. Retirement gives you the freedom to re-invent yourself.
The transition from full-time work to life in retirement won’t go as smoothly as you expect. You’ll struggle initially to come up with a new sense of purpose and meaning. Be
patient, but not complacent. Only you can figure out what’s important to you!
Finding the right balance of structure in your schedule will be a greater challenge than
you currently likely anticipate. Making time for activities that bring joy and fulfillment is
important. A schedule is not a bad thing if it reflects your values and aspirations.
Once you retire, you’ll worry less about money issues and more about your health and
that of your loved ones. As you plan your retirement think beyond just money issues. Take
a holistic approach that incorporates all the important areas of your life. Emphasize
balance.
In closing, it’s reassuring to see that the life satisfaction scores were highest among people who have been retired for more than two years. The future is bright.
Learn from those who are ahead of you on the retirement journey.
Your retirement will be better as a result.
Your Turn: If you’ve already retired, what was your biggest surprise about the transition? If you’ve not yet retired, what’s your biggest takeaway from this study, and are there any modifications you’ll make in your planning as a result? Let’s chat…
Fritz Gilbert is the Founder of The Retirement Manifesto, a Plutus Award winning blog dedicated to helping people Achieve A Great Retirement. After 30+ years in Corporate America, most recently as a Commodity Trader, Fritz retired as planned in June 2018 at Age 55. He and his wife are looking forward to extended travel and “giving back” to their community through charitable work in retirement. This blog was published on his website on May 18, 2023 and is republished here with his permission.
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