General

NIA on Canada’s 3-pillar Model of Retirement Income

The National Institute of Ageing is today releasing the next instalment [“the final Step 1”] of its series of papers on the Canada Pension Plan (CPP/QPP) and the Canadian retirement income system. The link invites readers to click on a download button for a full PDF of the report.

Recall that Findependence Hub’s introductory blog on this was published on April 11th here, and subsequently in my Retired Money column at MoneySense.ca on April 23: How to double your CPP Income. It also summarized in this second Hub blog on April 24th.

Below is a screenshot from the new paper: my comments follow below the graphic, which the NIA defines as a “redefined visual of the Canadian retirement income system.”

 

Recall that the entire series of papers is titled 7 Steps Toward Better CPP/QPP Claiming Decisions: Shifting the paradigm on how we help Canadians.  Step #1 is titled (Re)Introducing the Retirement Income System: A New Framework Tailored to the Retiree’s Perspective.

The accompanying text includes this overview:

“Canada’s retirement income system has traditionally been presented to the public as three pillars, consisting of government-sponsored retirement income programs (CPP/ QPP, OAS and GIS), workplace pension plans and personal savings. However, this traditional framing is a missed opportunity to help workers mentally transition into retirement, encouraging them to shift their attention toward the adequacy of their financial resources to successfully and sustainably finance their entire retirement.”

The paper goes on to point out that here is some irony involved in how the traditional “three pillar” framework of the retirement income system is presented: it does so from the perspective of providers (i.e., government, employers and the financial services industry), rather than those it is intended to inform.

“When viewed from the end user’s perspective, pensions are not a financial pillar of the retirement income system. They are the income foundation on which other financial resources rest.”

By viewing pensions as “a foundation rather than a pillar,” the NIA continues,  “the resulting framework provides a structure that is more focused on spending, with an ‘income’ foundation that securely and sustainably replaces employment income. Private assets accumulated on an individual or collective basis — including tax-deferred savings such as registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), and defined contribution (DC) pension plans — are ‘spending buckets’ on top of this foundation, providing flexibility to support non-routine spending throughout different retirement stages.” Continue Reading…

Inflation is getting to retirees and some pre-retirees, Fidelity survey finds

2024 Fidelity Retirement Report (CNW Group/Fidelity Investments Canada ULC)

More than four in five (82%) Canadian retirees say inflation is having a negative financial impact on them in retirement, according to a just-released report from Fidelity Investments Canada ULC.

The 2024 Fidelity Retirement Report also found that 43% of pre-retirees say the rising cost of living is delaying when they think they will retire. In addition, 59% of retirees report helping their non-student adult children in retirement: both with day-to-day expenses as well as big-ticket items like home purchases, weddings and even education savings for their grandchildren.

“It comes as no surprise that retirees are feeling the bite of inflation. Other macroeconomic issues such as a slowing economy, rising rates and volatile markets are also common factors that have negatively affected retirees financially,” says the report, “Pre-retirees are also feeling the pinch. We find that compared with last year, a larger share of pre-retirees are considering delaying their retirement in response to the rising cost of living.”

As you can see from the graphic below, the percentage of pre-retirees who plan to retire later than originally expected rose from 37% in the 2023 survey to 47% in the new 2024 edition.

While less than a third of those already in retirement have worked in some capacity once they have left full-time work, most pre-retirees anticipate that they will work at least part-time once they’re retired, according to the report.

While Fidelity cites rising inflation as one reason for this trend, it also says “most pre-retirees would like extra money for recreational purposes.” Further, the report says, “We also find that there isn’t a clear relationship between those working in retirement and their level of household income, suggesting that in general, many Canadians may be working or anticipating working to maintain a higher material standard of living, rather than just to keep up with the rising cost of essentials.”

 

Continue Reading…

Conquering Retirement Fear: from Apprehension to Adventure

Many dream of retirement, but as the big day approaches, some experience a surprising emotion: fear. Billy and Akaisha Kaderli, your guides to navigating retirement, delve into the anxieties that can lurk beneath the surface of financial preparedness.

RetireEarlyLifestyle.com/iStock

By Billy and Akaisha Kaderli

Special to Financial Independence Hub

All of your ducks are in a row.

You have saved and carefully invested for years, and the personal discipline is about to pay off.

So why is there apprehension in the bottom of your belly? Let’s be honest. There is risk involved, and the future no longer seems certain or familiar.

“What if I forgot about something?” you think, and start going over every plan you have made.

No one likes to admit straight out that they are afraid of retirement. Why, that sounds silly. But changing your life from one of being focused on work duties, raising a family, paying bills, and receiving that dependable paycheck every week to one of the virtually unknown has its own set of stresses. You’re being dishonest if you say it’s not a big leap mentally, emotionally, or financially.

Lack of confidence often underlies questions disguised as logistics on how to retire. Sometimes, one must simply take the leap of faith, making a companion of the ever-present question “What if?”

If you have spent your whole life building security and providing that same security the best you could for your family, then stepping into the unknown world of retirement is like jumping off a cliff.

Even if you’re as prepared as you think you are.

Sure, we can distract ourselves with dreams of endless golf, or margaritas on an exotic beach somewhere, but when it’s quiet, we find ourselves looking over our shoulders, wondering whether some forgotten component is lurking just out of sight.

What if I run out of money?,” you whisper to yourself.

Perhaps your personal fear-mongering nemesis is health care in retirement, your portfolio balance or even something as simple as boredom. There can be great comfort gained from all of one’s time being planned out months in advance.

Going sailing, Boracay, Philippine Islands

Going sailing, Boracay, Philippine Islands

To expect retirement to be free of hitches or snags is unreasonable. There are no guarantees in life. None of us knows what the future will bring, and this is true whether you’re working or retired. Continue Reading…

Capital Gains Tax Increase? This new Calculator helps Corporation and Trust accounts

 

By Ted Rechtshaffen, CFP

Special to Financial Independence Hub

As you may know, the recent Federal Budget announcement had a few important changes that can have an impact for some, but certainly not all.  The most discussed has been the increase to the capital gains tax.

The most directly impacted are those with investments in a Corporation or a Trust.  Not only will they face an increase in taxes on every dollar of capital gains (not just after $250,000 as it is on personal accounts), but this is forcing some important near term decision making.

For many people in this situation, the question for investments with unrealized capital gains is whether to hold those securities longer term or sell them prior to June 25th to avoid the new higher tax rate.

To help with that choice, we have just launched a new calculator aimed at this group.

It is free for anyone to access.  They don’t have to provide any details.

The calculator can be found at New Capital Gains Tax – Sell or Hold Calculator – TriDelta Private Wealth

Continue Reading…

Private Equity Returns

Image via Pexels/Markus Winkler

By Michael J. Wiener

Special to Financial Independence Hub

One of the ways that investors seek status through their investments is to buy into private equity.  As an added inducement, a technical detail in how private equity returns are calculated makes these investments seem better than they are.  So, private fund managers get to boast returns that their investors don’t get.


Private Equity Overview

In a typical arrangement, an investor commits a certain amount of capital, say one million dollars, over a period of time.  However, the fund manager doesn’t “call” all this capital at once.  The investor might provide, say, $100,000 up front, and then wait for more of this capital to be called.

Over the succeeding years of the contract, the fund manager will call for more capital, and may or may not call the full million dollars.  Finally, the fund manager will distribute returns to the investor, possibly spread over time.

An Example

Suppose an investor is asked to commit one million dollars, and the fund manager calls $100,000 initially, $200,000 after a year, and $400,000 after two years.  Then the fund manager distributes returns of $200,000 after three years, and $800,000 after four years.

From the fund manager’s perspective, the cash flows were as follows:

$100,000
$200,000
$400,000
-$200,000
-$800,000

So, how can we calculate a rate of return from these cash flows?  One answer is the Internal Rate of Return (IRR), which is the annual return required to make the net present value of these cash flows equal to zero.  In this case the IRR is 16.0%.

A Problem

Making an annual return of 16% sounds great, but there is a problem.  What about the $900,000 the investor had to have at the ready in case it got called?  This money never earned 16%.

Why doesn’t the fund manager take the whole million in the first place?  The problem is called “cash drag.”  Having all that capital sitting around uninvested drags down the return the fund manager gets credit for.  The arrangement for calling capital pushes the cash drag problem from the fund manager to the investor.

The Investor’s Point of View

Earlier, we looked at the cash flows from the investment manager’s point of view.  Now, let’s look at it from the investor’s point of view.

Suppose the investor pulled the million dollars out of some other investment, and held all uncalled capital in cash earning 5% annual interest.  So the investor thinks of the first cash flow as a million dollars.  Any called capital is just a movement within the broader investment and doesn’t represent a cash flow.  However, the investor can withdraw any interest earned on the uncalled capital, so this interest represents a cash flow.

The second cash flow is $45,000 of interest on the $900,000 of uncalled capital.  The third cash flow is $35,000 of interest on the $700,000 of uncalled capital.  The fourth cash flow is a little more complex.  We have $15,000 of interest on the $300,000 of uncalled capital.  Then supposing the investor now knows that no more capital will be called and can withdraw the remaining uncalled capital, we have a $300,000 cash flow.  Finally, we have the $200,000 return from the fund manager.  The total for the fourth cash flow is $515,000.  The fifth cash flow is the $800,000 return.

The cash flows from the investor’s point of view are

$1,000,000
-$45,000
-$35,000
-$515,000
-$800,000

The IRR of these cash flows is 10.1%, a far cry from the 16.0% the fund manager got credit for.  We could quibble about whether the investor really had to keep all the uncommitted capital in cash, but the investor couldn’t expect his or her other investments to magically produce returns at the exact times the fund manager called some capital.  The 10.1% return we calculated here may be a little unfair, but not by much.  The investor will never be able to get close to the 16.0% return.

Others have made similar observations and blamed the IRR method for the problem.  However, this isn’t exactly right.  The IRR method can have issues, but the real problem here is in determining the cash flows.  When we ignore the investor’s need to be liquid enough to meet capital calls, we get the cash flows wrong.

Conclusion

Some argue that we need to use the IRR method from the fund manager’s point of view so we can fairly compare managers.  Why should investors care about this?  They should care about the returns they can achieve, not some fantasy numbers.  Any claims of private equity outperformance relative to other types of investments should be taken with a grain of salt.

Michael J. Wiener runs the web site Michael James on Moneywhere he looks for the right answers to personal finance and investing questions. He’s retired from work as a “math guy in high tech” and has been running his website since 2007.  He’s a former mutual fund investor, former stock picker, now index investor. This blog originally appeared on his site on Feb. 15, 2024 and is republished on the Hub with his permission.