Tag Archives: retirement income

Doing it: 50% more income in Retirement

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By Mark Yamada and Ioulia Tretiakova

Special to the Financial Independence Hub

Nobel laureate William Sharpe described managing retirement assets as the “nastiest hardest problem in finance.” Living longer on a fixed pool of capital is only the start of a problem complicated by the myriad of possible personal and family needs and obligations that develop over a lifetime.

The need

Demographics are driving big change in the retirement market. Not only will Gen Y workers have fewer opportunities to save for retirement because of high predicted job turnover and reduced access to workplace pensions, but retiring baby boomers are being abandoned by the very industries created to serve them.

The pension, mutual fund and wealth management industries are direct responses to boomers joining the work force, but fewer retiring boomers meet the criteria for investment advisors who are compensated for growing assets. Retiree portfolios don’t get contributions and many are too small to qualify as brokerage minimums rise. Most mutual fund fees are too high for this cohort for whom costs are more important than ever before. The number of advisors is also shrinking, not only because of compensation and compliance pressures but also because advisors too are retiring.

Saving more, starting earlier and taking more risk are the accepted ways to improve retirement outcomes. Two or more of these options may no longer be available for retirees. A growing crisis in retirement savings is stretching an already extended social welfare system and new thinking is needed if disaster is to be averted.

Solutions not products

Our research motivation (Journal of Retirement and two Rotman International Journal of Pension Management papers) is a belief that investing can be improved to solve problems. The pension problem, for example, is best resolved by focusing on what workers really want, reliable replacement income in retirement rather than trying to pick the best performer every period. Consumers today want solutions. The investment industry is still about products.

Just as someone who only owns a hammer sees every problem as a nail, the industry has a singular focus on “maximizing returns.” This sounds good, but anyone using Google maps knows the fastest route to a destination is not necessarily the shortest. UPS routes deliveries to avoid turns against oncoming traffic to reduce accidents and delays waiting for gaps. Their drivers make 90% right hand turns and experience shorter delivery times, lower fuel consumption and operate smaller fleets. What if investment portfolios could similarly be routed more efficiently to correct destinations?

Autonomous portfolios

The self-driving automobile that protects passengers from immediate risks and routes itself to a predetermined destination provides a template for an autonomous portfolio.

Getting to a destination is a different strategy than going as fast as possible all the time. For starters, brakes and steering are needed not just an accelerator pedal. Maximizing returns, the investment industry’s primary approach, is about going fast. If your strategic asset mix is 65% stocks and 35% bonds, your advisor will periodically rebalance to this mix. If stocks go down, she will buy more stocks. This sounds like the right thing to do, and it is, if your investing time horizon is long enough to make back accelerating loses over the next market cycle; your portfolio is throwing money at a falling market after all. For an aging population in general and retiring baby boomers in particular, this is an increasingly risky and unpalatable proposition.

How we can do it

To protect portfolios we keep risks as constant as possible. When volatility rises, some risky assets, like stocks, are sold and less risky ones, like bonds, are added. When volatility falls, we add riskier assets. The critical effect is avoiding big losses. Statistically this is like card counting in the casino game of blackjack. When volatility is higher than average, the deck is stacked against the player. This means we expose portfolios primarily to markets that are favorable. It’s an unfair advantage but it’s legal! Continue Reading…

CPP Reality Check

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Repeat after me: The Canada Pension Plan will be there for me when I retire.

In fact, CPP is sustainable over the next 75 years according to the most recent report issued by Canada’s Chief Actuary. This projection assumes a modest 3.9 per cent annual real rate of return over that time.

The plan is operated at arms length from governments by the CPP Investment Board (CPPIB), whose sole mandate is to maximize long-term investment returns in the best interests of CPP contributors and beneficiaries.

Despite this assurance, I still see numerous comments on blogs and social media dismissing CPP as something doomed to fail.

“The feds are robbing the CPP fund to pay for infrastructure and massive debt loads.”

“I’m fairly certain there won’t be a CPP fund in 25 years when I’m ready to retire.”

“My retirement projections don’t include CPP, just in case . . . “

The media exacerbates the problem by reporting on the CPPIB’s quarterly earnings, which, most recently, slumped to 0.7 per cent thanks to a strong loonie dragging down its foreign investments. But to the CPPIB and its long-term investing mandate, a quarter isn’t measured in three months: it’s more like 25 years.

Don’t ignore CPP in your retirement projections

It’s a mistake to ignore CPP benefits in your retirement planning projections. While it won’t save your retirement, CPP is paying out on average $653 per month for new beneficiaries as of July, 2017. The maximum monthly payment amount [if taken at age 65] is $1,114.17.

Continue Reading…

How Group Annuities can help employers protect Defined Benefit pensions

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Source: Mercer Pension Health Index published October 2, 2017

By Brent Simmons, Sun Life Financial

Special to the Financial Independence Hub

Recently, employees and retirees of Sears were stunned to learn they may not receive all of their defined benefit (DB) pension when it declared bankruptcy. They learned their pension plan was underfunded and the company had requested that it be allowed to stop making the contributions required by Ontario laws. The plight of Sears employees and retirees has left many Canadians wondering if their DB pension plan is healthy and if their DB pension is safe.

The pension challenge

With a DB pension plan, a company promises their employees a pension for life and is responsible for paying the pension: whatever the cost ends up being. The problem is that low interest rates and choppy equity markets have made the funding level of many pension plans look like a roller roaster ride. This can be seen in the chart at the top of this blog.

Another challenge facing pension plans is that Canadians are living longer, meaning that pensions need to be paid for a longer time. A common rule of thumb is that one year of additional life expectancy at age 65 can increase the cost of the pension plan by 3% to 4%.

In a tough economy, the need to contribute to a pension plan can often come at a time when a company’s core business is also facing financial difficulties. If a company becomes bankrupt, then the company likely won’t be able to pay the contributions owed to the pension plan and employees may indeed face a shortfall in its pensions.

How Group Annuities protect their employees’ pensions 

The good news is that a growing number of Canadian companies are taking steps to protect their employees’ pensions. They are buying group annuities to transfer the financial risk of their pension plans to insurance companies, which are subject to strict regulations and must have funds on hand at all times to pay promised pensions. With a group annuity, an insurer assumes responsibility for providing the pensions to a company’s retirees in exchange for a fee, and the retirees continue to receive their promised pension.

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WealthBar Q&A: How one Robo-advisor handles Retirement Income Planning

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WealthBar CEO Tea Nicola

What follows is a sponsored Q&A session between Hub CFO Jonathan Chevreau and Tea Nicola, Co-Founder and CEO of WealthBar, a robo-adviser.

WealthBar provides financial planning with low-fee ETF portfolios and actively managed Private Investment Portfolios.

Through their financial advisers, easy-to-use online dashboard and financial tools, they are making investing more accessible for Canadians from coast to coast.

 

 

 

Jon Chevreau

Jon Chevreau: Welcome, Tea. While many so-called robo-advisers seem to focus on young people building wealth, what about the end game? How do you handle the shift for older investors from accumulation into spending your savings in retirement? 

Tea Nicola: Once a client who is accumulating assets decides that retirement is on the horizon and they let us know, we lead them into the retirement transition process. At this stage, they probably have a pretty good idea as to what they would like to spend after taxes. Their goal is to understand now if their savings and all their sources of income will be enough to fund their retirement years.

The conventional wisdom is to collect all the sources of income that the client will have and analyze it year by year. This step is essential to make sure that the goals are met. That includes the monthly cash flow for basic expenses, the annual travel budgets and one-off purchases as well as any legacies that they may desire.

We then make sure their savings can meet all those goals. If there are shortfalls, we adjust the savings rate to meet the goals by the time they want to stop working. Then, we iterate this every six months or so, both before and after the retirement date. We do this to make sure the transition is smooth and that routines are appropriately established.

Jon: You’re talking about managing expectations?

Tea: I would call it being realistic about expectations. For instance, we need to be careful about talking about a monthly income when it comes to drawing down on retirement savings.

What we typically see is an uneven drawdown, with extra spending in the first few years of retirement. The client is in a rush to do all the things they held off on while working. So, they go on world tour, get a golf membership, enjoy some fine dining, or generally treat themselves to something special. But after a few years, their spending habits ‘normalize.’ The initial exuberance declines and their expenses follow suit. You get cases like one client in her 90s, who is literally worth millions, who now has monthly expenses of about $2,000 a month.

With that in mind, our financial plans help clients to achieve the goals they want to achieve, without necessarily boxing them into a lifestyle category that doesn’t really apply for most of their retirement. This involves very realistic, practical planning that I would say goes into a bit more depth than other robo-advisers, or even many traditional wealth management firms.

Jon: Sometimes you’ll hear a kind of magic number bandied about for how much people need to retire. $1 million. $2 million … Is there a guideline that really makes sense?

Tea: It depends on the person, which is why financial planning needs to be tailored for each individual. Just like with salaries, we know that someone making $75,000 can feel like they’ve got as much money as they could possibly need. Continue Reading…

What to expect when applying for CPP

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What should you expect when applying for CPP (Canada Pension Plan) benefits? As my latest Retired Money column for MoneySense explains, age 64 is not just the age the Beatles ask the question “Will you still need me, will you still feed me?”

It’s also the age when Service Canada can be expected to reach out to you with a letter to your home address, giving you details of how the Government of Canada will feed you with CPP benefits once you turn 65 (or as early as 60 should you choose reduced early benefits).

But fear not, Ottawa will also  still need you, in the form of taxable revenue: like Old Age Security, CPP benefits are fully taxable.

The full piece can be accessed by clicking on the highlighted headline: CPP application: Here’s what to expect during the process.

The piece’s focus is on the actual application process but does touch on the age-old topic of the optimal age to start receiving benefits: which can be anywhere between age 60 and 70. The Hub has tackled this several times in its almost three years of existence. Use the search engine to the right and enter CPP, or click here.

Try the Canadian Retirement Income Calculator

The piece also links to a useful web tool provided by Service Canada: the Canadian Retirement Income Calculator, which you can access by clicking on the highlighted text.

Continue Reading…