Tag Archives: Retirement

Short and Steady wins the race: The case for Short-term bonds

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Franklin Templeton/Getty Images

By Adrienne Young, CFA

Portfolio Manager, Director of Credit Research, Franklin Bissett Investment Management

(Sponsor Content)

The phrase “hunt for yield” is by now a well-worn cliché among fixed income investors. Persistently low yields have led many investors to take on additional risk, and some have considered abandoning fixed income altogether.

We think this is a mistake. Even amid fluctuating yields, inflation jitters and pandemic-driven economic upheaval, fixed income can help maintain stability and preserve capital: if you know where to look.

Why Short-term now

For increasing numbers of investors, the short end of the yield curve is the place to be in the current environment. Short-term rates reflect central bank policy actions. Since the pandemic first took hold early in 2020, central banks have taken extraordinary measures to keep liquidity pumping into the marketplace, all without raising rates. Both the Bank of Canada and the U.S. Federal Reserve have so far left their overnight lending rates unchanged and have indicated their intent to continue along this path well into next year, and possibly longer. This predictability has stabilized, or anchored, short-term rates. In contrast, longer maturities have been prone to volatility as the stop-and-go nature of the pandemic has influenced economic reopening, inflation expectations and financial markets.

Franklin Bissett Short Duration Bond Fund is active in short-term maturities, with an average duration of 2-3 years. About 30% of the portfolio is held in federal and provincial bonds; most of the remaining 70% is invested in investment-grade corporate bonds.

Beyond stability, investments need to make money for investors. In this fund, duration and corporate credit are important sources for generating returns. Historically, the fund has provided investors with better returns than the FTSE Canada Short Term Bond Index1  or money market funds, and with comparatively little volatility.

In It for the Duration

Duration is a measure of a bond’s sensitivity to interest rate movements. Imagine the yield curve as a diving board, with the front end of the curve, where short-term rates reside, anchored to the platform. Like a diver’s body weight, pandemic-driven economic forces have placed increasing pressure further out along the curve. The greatest movement ― expressed as volatility ― has been at the long end, especially in 30-year government bonds. Currently, the fund has no exposure to these bonds.

Cushioned by Corporates

Corporate debt provides a cushion against interest rate volatility, and a portfolio that includes carefully selected corporate securities as well as government debt can therefore be a bit more protective. In addition, the spread between corporate and government bonds can provide excess returns.

We believe it is not unreasonable to anticipate stronger Canadian economic and corporate fundamentals in 2021 and 2022, as well as continued demand for bonds from yield-hungry international investors. These conditions support a continuation of the current trend of a slow grind tighter in spreads, with higher-risk (BBB-rated) credits outperforming safer (A and AA-rated) credits.

Credit Quality is Fundamental

In keeping with Franklin Bissett’s active management style, in-house fundamental credit analysis is a key element of our investment process for the fund. Unless we are amply compensated for both credit and liquidity risk (particularly in the growing BBB space), at this stage of the economic cycle we prefer higher-quality credit. We look for strong balance sheets, good management teams, excellent liquidity, clear business strategy and larger, more liquid issues. Continue Reading…

JP Morgan, RBC on post-Covid Retirement trends

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A couple of recent surveys from J.P. Morgan Asset Management and RBC shed a fair bit of light into recent Retirement trends in North America in the wake of the ongoing Covid-19 pandemic. Summarized in the October 2021 issue of Gordon Wiebe’s The Capital Partner newsletter, here are the highlights:

First up was J.P. Morgan on August 19 in a study focused on de-risking for investors approaching retirement and about to draw down on Retirement accounts.

The study was quite comprehensive, drawing on a data base of 23 million 401(k) and IRA accounts and 31,000 Americans. 401(k)s and IRAs are similar to Canada’s RRSPs and RRIFs.

De-risking is quite common, with 75% of retirees reducing equity exposure after “rolling over” their assets from a 401(k) to an IRA. These retirees also relied in the mandatory minimum withdrawal amounts.

Of those studied, 30% received either pension or annuity income, and the median value of Retirement accounts was US$110,000. The median investable assets were roughly US$300,000 to US$350,000, with the difference coming from holdings in non-registered accounts.

Not surprisingly, the most common retirement age was between 65 and 70 and the most common age for commencing the receipt of Social Security benefits was 66. (Coincidentally, the same age Yours Truly started receiving CPP in Canada.)

The report warns that retirees who wait until the rollover date to “de-risk” or rebalance portfolios needlessly expose themselves to market volatility and potential losses: they should consider rebalancing well before the obligatory withdrawal at age 71.

The newsletter observes that 61-year-olds represent the peak year of baby boomers in Canada and cautions that if they all retire and de-risk en masse, “Canadian equity markets will likely undergo increased downward pressure and volatility. Retirees should consider re-balancing or ‘annualizing’ while markets are fully valued and prior to an increase in capital gains or interest rates.”

The report includes several interesting graphs, which you can find by clicking to the link above. The graph below is one example, which shows average spending (dotted pink line) versus average retirement income (solid green line.) RMD stands for Required Minimum Distributions for IRAs, which is the equivalent of Canada’s minimum annual RRIF withdrawals after age 71.

EXHIBIT 4: AVERAGE RETIREMENT INCOME AND SPENDING BY AGES Source: “In Data There Is Truth: Understanding How Households Actually Support Spending in Retirement,” Employee Benefit Research Institute & J.P. Morgan Asset Management.

RBC poll on pandemic impacts on Retirement and timing

Meanwhile in late August, RBC released a poll titled Retirement: Myths & Realities. The survey sampled Canadians 50 or over and found that the Covid-19 pandemic has caused some Canadians to “hit the pause button on their retirement date.” 18% say they expect to retire later than expected, especially Albertans, where 33% expect to delay it.

They are also more worried about outliving their money, with 21% of those with at least C$100,000 in investible assets expecting to outlive their savings by 10 years. That’s the most in a decade: the percentage was just 16% in 2010.

Sadly, 50% do not yet have a financial plan and only 20% have created a final plan with an advisor or financial planner.

Those near retirement are also resetting their retirement goals. Those with at least $100,000 in investable assets now estimate they will need to save $1 million on average, or $50,000 more than in 2019. 75% are falling short of their goal by almost $300,000 on average.

Those with less than $100,000 have lowered their retirement savings goal to $533,153 from $574,354 in 2019, and the savings gap is a hefty $472,994.

To bridge the shortfall, 37% of those with more than $100K plan stay in their current home and live more frugally, compared to 36% of those with under $100K. 31% and 36% respectively plan to return to paid work, 31% and 23% plan to downsize or move, and 3 and 5% respectively intend to ask a family member for financial assistance.

 

 

Retired Money: What is the Rule of 30?

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ECW Press

My latest MoneySense Retired Money column reviews actuary Fred Vettese’s new retirement book: The Rule of 30 (ECW Press).

You can find the full column by clicking on the highlighted headline here: What’s the Rule of 30? And what does it have to do with Income and Retirement?

Never heard of the Rule of 30? Neither had I, nor Fred himself until he invented it.

In a nutshell, it’s a rule of thumb financial planners can use to guestimate how much young couples starting off on their financial journeys need to save for Retirement. Rather than flatly state something like save 10 or 12 or 15% of your gross (pre tax) income each and every year, the Rule of 30 sees retirement saving as occurring in tandem to Daycare and Mortgage Repayment.

From the get go Vettese suggests young couples allocate 30% of their gross or after-tax income to the three expenses of Retirement saving, Daycare and Mortgage paydown. However, in the early years they may save less in order to handle Daycare and the mortgage. Since daycare expenses usually fall away after a few years (depending on how many children a couple has), once it has gone you can ramp up the mortgage paydown and/or retirement savings. And if – ideally five years before retirement – the home mortgage is paid off, then couples can kick their retirement saving into overdrive by allocating a full 30% or more solely to building their nest egg.

Wealthy Barber style fictional format

In a departure from his previous books — Retirement Income for Life and The Essential Retirement Guide among them — The Rule of 30 uses the tried-and-true quasi-fictional “story” pioneered by David Chilton’s The Wealthy Barber. That road has been ploughed by many subsequent financial authors, including Yours Truly in Findependence Day. 

As Vettese told me in an interview mentioned in the column, he didn’t plan it that way initially. “I did a first chapter using that format and then realized it’s a lot easier to write this way and it’s not as dry: it’s somewhat easier to read and to write. When you get a problem, a character chimes in.”

The main characters are a couple, X and Y, and — conveniently — the neighbour next door who happens to be an actuary with time on his hands.

No doubt it would have worked either way, but Vettese’s dialogs are readable enough and he even works in a minor subplot involving the actuary and his estranged daughter.

One of the people acknowledged by Vettese at the back of the book is fellow actuary and retiree Malcolm Hamilton. In an email, Hamilton said “I have always believed that middle class Canadians who marry, buy a house and have children cannot reasonably expect to save much for retirement until after the age of 45,” Hamilton told me via email, “There just isn’t enough income to cover mortgage payments, the cost of raising children and Canada’s heavy tax burden (with child care expenses and mortgage payments generally non deductible for those with incomes that suggest they need to save.”

All in all, a useful rule of thumb for young couples setting out on family formation, home ownership and ultimately Retirement. Note that Vettese says that once you are within five years of your hoped-for Retirement age, you should strive to be mortgage free. And around 55, you should move from the Rule of 30 to using a Retirement calculator like the free one Vettese developed for Morneau Shepell: PERC, or the Personal Enhanced Retirement Calculator.

PS: I am now Investing Editor at Large for MoneySense

Alert readers who got to the bottom of the column and read the author blurb will see a slight change in my status at MoneySense. In addition to writing the monthly Retired Money column I am now also the Investing Editor at Large for the site, a fact that’s also divulged in my Twitter profile.  I will continue to publish Hub blogs every business day: so much for Retirement!

 

 

 

Overlooked retirement income and planning considerations

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By Mark Seed, MyOwnAdvisor

Special to the Financial Independence Hub

I’ve updated this retirement income planning post to reflect some current thoughts. Check it out!

I’ve mentioned this a few times on my site: there is a wealth of information about asset accumulation, how to save within your registered and non-registered accounts to plan for retirement. There is far less information about asset decumulation including approaches to earn income in retirement.

Thankfully there are a few great resources available to aspiring retirees and those in retirement – some of those resources I’ve written about before.

Retirement income and planning articles on my site:

One of my favourite books about generating retirement income is one by Daryl Diamond, The Retirement Income Blueprint. 

An article about creating a cash wedge as you open up the investment taps.

A review about The Real Retirement.

These are six big mistakes in retirement to avoid.

A review of how to generate Retirement Income for Life.

This is my bucket approach to earning income in retirement.

Here are 4 simple ways to generate more retirement income.

Can you have too much dividend income? (I doubt it!)

Other resources and drawdown ideas:

Instead of focusing on the 4% rule, you can drawdown your portfolio via Variable Percentage Withdrawal (VPW).

A reminder the 4% rule doesn’t work for everyone. Some people ignore the 4% rule altogether.

Getting older but my planning approach stays the same

As I get older, I’m gravitating more and more this aforementioned “bucket approach” for retirement income purposes. This bucket approach consists of three key buckets in our personal portfolio to address our needs:

  • a bucket of cash savings
  • a bucket of dividend paying stocks
  • a bucket of a few equity Exchange Traded Funds (ETFs).

My Own Advisor Bucket Approach May 2019

Rethinking Retirement (RIP) and FIRE

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

Today’s post will weave together retirement as seen in a more traditional sense and those who practice F.I.R.E. – an acronym for financial independence and retire early. In the Globe and Mail Brenda Bouw offered that the COVID pandemic is giving early retirees second thoughts, they’re going back to work. On FiPhysician, Dr. David Graham offers that traditional retirement is dead – RIP. The old approach will fall on its face. We might run out of money before we run out of time. We will also see how Justwealth has crushed mutual funds over the last five years. Enjoy. We’re rethinking retirement on the Sunday Reads.

We’ll start with rest in peace RIP retirement on FiPhysician. Or, is retirement an acronym? Of course on this site Dr. Graham inspired – how does the pandemic end?

Well, with the common cold.

We no longer work til we drop dead

That retirement piece shows how retirement risks have changed. We are no longer working until we drop dead Dr. Graham offers. We are living longer (generally are much more healthy) than past decades and centuries and we will spend decades in retirement. The traditional retirement funding approach used by our parents and grandparents will not get the job done. Traditionally, social security (CPP in Canada) a pension and home value would do the trick. That requires a re-think offers Dr. Graham.

For starters those government pension won’t keep up with ‘real inflation’ compared to what the government reports. Lots of fudging of ‘official’ numbers on that front.

So, with the three-legged stool of traditional retirement, you cannot keep up with inflation over longer periods of time. Retirement is an anachronism because you cannot fund it.

On the future of retirement and how we might best prepare …

Consider that which is currently changing the world of employment: smart phones and the gig economy.

You won’t retire in the future; you will monetize your hobby and have gigs from your smart phone. After all, we must move from a knowledge-based society to a wisdom-based one. Everyone has knowledge at the tip of their fingers all the time. Who has all the wisdom?

So funny, as I am personally living that now, and by design. I am living proof as are many in today’s new normal for “retirement”. I have the portfolio, I monetize any knowledge or wisdom that might have value. Any gov pension will be a bonus that will not be counted on in any meaningful way. We have real estate.

Protect the portfolio from inflation

I am also of the school that we can protect our portfolio income assets from inflation. And research shows that we need the true inflation fighters such as gold and other commodities and real assets. Continue Reading…