Tag Archives: Retirement

Financial knowledge of Canada’s retirement system isn’t improving, study shows

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Financial knowledge about the Canadian retirement system fell from 2020 to 2021, says the Retirement Savings Institute.

The financial literacy of average Canadians is still low when it comes to understanding our Retirement system, says a survey being released Tuesday. The third edition of the Retirement Savings Institute (RSI) surveyed 3,002 Canadians aged 35 to 54 and found the overall RSI index measuring knowledge of the retirement income system slipped from 38% in 2020 to 37% in 2021. This, it says, is “still showing a significant lack of knowledge among Canadians.”

The RSI Index is the share (stated as a percentage) of correct answers to  29 questions posed in the survey.

The best-understood subjects continue to be CPP/QPP and RRSPs/TFSAs. Canadians still find it tougher to understand employer sponsored pension plans and Old Age Security, where the average respondents “didn’t know” the answer to half the questions.

In a backgrounder, the RSI team at HEC Montreal [a business school] says the scientific literature in several countries has established a link between general financial literacy and preparation for Retirement. However, “the level  of general financial literacy among Canadians is fairly low, although comparable to what is observed elsewhere in industrialized countries.” It also finds knowlege about narrower topics like taxes to be “rather limited.”

Starting in 2018, the RSI started to measure on an annual basis the financial literacy of Canadians in their “years of strong asset accumulation in preparation for retirement.” Those younger than 35 tend to have “other concerns and financial priorities than retirement,” the RSI says.

Knowledge rises with education and income, and as retirement nears

Not surprisingly, the closer to Retirement age one is, the more knowledgeable of related financial matters we tend to become. The RSI score was 33.9% for the youngest in the survey aged 35 to 39, rising to 36.6% for the 40 to 44 cohort, then to 37.8% for the 45-49 group, and a high of 39.5% for those 50 to 54.

Also as one would expect, the more schooling the higher the score: those with high school or less had an RSI score of 31.5%, while those with college or equivalent scored 36.9%, and those with a Bachelor’s degree or higher scored on average 45.3%. Similarly, the higher the household income, the better knowledge. Thus, those with household income of $30,000 or less scored just 26.1%, compared to $60,000 to $90,000 families scoring 37.3% and at the highest, families making $120,000 or more scored 45.6%.

Equally unsurprising is the fact that higher earners are more knowledgeable about RRSPs and TFSAs, especially when it comes to contribution room and withdrawal rules. They are less knowledgeable about investment returns in those vehicles, and score a low 12.6% on penalties for over contributions and other rules related to taxes.

Many confused about Employer Pensions

Employer pension plans seems to be an issue. At all ages, Canadians found it difficult to know the difference between Defined Benefit (DB) and Defined Contribution (DC) pension plans. In particular, they tend to be confused about which one reduces longevity risk (DB) and which depends on returns generated by financial markets (DC). Low-income individuals are even less knowledgeable.

Workers who are contributing employer pension plans had significantly higher scores (41%) than those who were not enrolled in such plans (32.9%).

The older and richer understand CPP/QPP better

Also as you’d expect, older people and more well-off people understand the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) better. As the chart below illustrates, most Canadians are now well aware that taking early CPP/QPP benefits results in lower monthly benefits (shown in the “Penalty” bar), but there is still a lot of confusion about whether CPP/QPP recipients can collect benefits while still working (only 25% correctly answer this.)

Most Canadians know there is a penalty for taking CPP/QPP benefits early but there is much confusion about collecting while still working.

Older people also know OAS and GIS better. As the chart below shows, most people know you have to be at least 65 years old to receive OAS, but knowledge about technical matters like the OAS clawback, the Guaranteed Income Supplement to the OAS, and taxation of these benefits tends to be much scantier.

Basic OAS timing seems well understood but many are murky when it comes to clawbacks and eligibility and taxation of GIS benefits.

Mortgages well understood, bonds and debt not so much

When it comes to major financial products, Canadians are quite knowledgeable about compound interest, but as less so about debt doubling and quite ill-informed about Bonds, as the chart below indicates. ( Continue Reading…

63% neglected Retirement saving during Covid; study sees urgent need for Workplace pensions

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Over the course of the Covid pandemic the past year, almost two thirds of Canadians (63%) did not put aside anything for retirement, up from 58% last year, according to a study being released today.

That’s according to the third annual Canadian Retirement Survey from Healthcare of Ontario Pension Plan (HOOPP) and Abacus Data.

Not surprisingly, the survey also found a widespread belief that better access to workplace pensions is needed to avoid a retirement crisis.

The findings, based on an April 2021 survey of 2,500 Canadians, affirm there is a high level of anxiety about ability to save for retirement. Half (48%) said they are “very concerned” about not having enough money in retirement. That was more than the concern for one’s own physical health (44%), mental health (40%), debt load (31%) and job security (26%).  Only the daily cost of living was a greater concern than Retirement.

Steven McCormick, hoopp.com

“After more than a year of COVID-19, Canadians remain steadfast in their personal and societal concerns around retirement security,” said Steven McCormick, SVP, Plan Operations, HOOPP in a press release [pictured on right]. “As day-to-day financial pressures mount for some and ease for others, Canadians across the board are acutely aware of the importance, and challenge, of saving for retirement.”

While 46% of Canadians said they saved more money during COVID than they otherwise would have, more than half (52%) set aside nothing for retirement during the past year. Of those who said they saved less than usual, 72% saved nothing for retirement.

McCormick added: “HOOPP is proud to do its part by providing retirement security to healthcare workers, many of whom fall into groups that often don’t have access to pensions, such as women, part-time workers and younger Canadians. For our membership, the impacts of this pandemic will continue to be felt even after we emerge from the immediate crisis; but they can take some comfort in knowing their pension is secure.”

Covid disproportionately hurt finances of younger low-income groups

The COVID-19 pandemic harmed the finances of half of Canadians (52%) and did so disproportionately amongst younger and lower-income groups. Those aged 44 and younger are twice as likely to have had their finances greatly harmed (24%) than those 60+ (11%). Likewise, those earning less than $50,000 are twice as likely to have had their finances greatly harmed (25%) than those earning $100,000+ (12%). Continue Reading…

Purpose Longevity Pension Fund game changer for Canadian retirees?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It’s possible that the game has been changed for the better, for Canadian retirees. Purpose Investments has launched a retirement funding mutual fund that is designed to deliver an annual payout at 6.15% annual. That is, the fund would pay out a minimum of 6.15% of your initial total fund value. For every $100,000 that you have invested, you would receive an annual payment $6,150. Introducing the Purpose Longevity® Pension Fund.

The Purpose Longevity Pension Fund offers the pension model, now available to the typical investor. Advisors will also be able to use the fund and will collect a modest trailing commission. For many Canadian retirees it will certainly be a game changer.

Income for life.

One of the greatest fears for retirees is running out of money. And most retirees don’t want to manage their own investments. They want to enjoy life, without financial worry. The Purpose Longevity Pension Fund will allow Canadians to top up their Canada Pension Plan and Old Age Security payments. Retirees may have other private pensions and other assets within the mix. The fund will allow a retiree to pensionize a large percentage of their liquid assets. They approach would remove much of the stock and bond market (volatility) risk.

And more importantly perhaps, it would remove the risk of investors messing up their retirement portfolio (and retirement funding) by way of bad behaviour.

Related post: Pensionize your nest egg with annuities: your super bonds.

The Purpose fund sits between the Vanguard VRIF ETF retirement funding solution and the traditional annuities. The Vanguard ETF is designed to pay out at a 4% rate of the portfolio value, adjusted each year.

An annual 6.15% payment (at age 65) is a big step up the retirement funding ladder.

When a retiree manages their own investment portfolio they will often use the 4% rule as a benchmark for the level that the portfolio can safely deliver retirement income, including an annual inflation adjustment. On Boomer and Echo I had offered …

The 4% rule. Is there a new normal for Canadian Retirees?

Everything changes in the decumulation stage.

Life changes and priorities change when we switch to the retirement or decumulation stage. Retirees just want to get paid.

Purpose Investments Presentation

Canadian retirees are not necessarily well served by the financial institutions in the retirement stage.

Purpose Investments Presentation

The pension model for the masses.

How does a fund pay out at a 6.15% rate (and potentially to increase) while studies show that a balanced or conservative investment mix can only ‘safely’ pay out at a 4%-4.5% level? Once again it follows the model used by pension funds (public and private) around the world.

I asked Som Seif, CEO of Purpose Investments to deliver an explanation.

It is based on what they call Longevity Risk Pooling. The difference between the required return on the fund (net 3.5%) and the income paid to investors (6.15%+) is because when people buy, they get their income, but as some people redeem/pass away earlier, they leave behind in the pool their returns on their invested capital (ie they get their unpaid capital out upon death or redemption).  These returns left behind reduce the total return required to provide the income stream for all investors.

Som Seif

It is the pooling of funds by the collective group of investors that will hold the fund, that delivers the secret sauce. There is retirement funding strength in numbers.

This is called Longevity Risk Pooling (or Sharing).

And as per the above quote, the underlying fund holdings only have to deliver at an annual 3.5% rate of return for the Purpose Longevity Pension Fund to deliver on the 6.15% funding level. Here’s ‘the how’ …

If you put in $500,000. After a number of years you receive distributions of $200,000, but then you pass away.  Your estate would receive the unpaid capital of $300,000 ($500k-$200k). The return on the invested capital would stay in the pool for the benefit of all of the investors remaining.  This return would reduce the overall required return for everyone.

Som Seif

The approach as been back tested.

Morneau Shepell conducted extreme stress testing on the model, which included the use of their economic scenario generator (ESG) that produced over 2,000 different simulations of future paths of economies and financial markets.

Probability of success (i.e. not having to decrease the income payout):

  • Over a 25 year period: 91%
  • Over a 35 year period: 86%

Purpose Investments can reduce income levels to ensure that the assets are never depleted and that income payments can continue to unitholders for their lifetime.

Net, net, the payments could move higher or lower. The risk will be managed, while any benefits offered by the markets will be passed along to investors.

The fund series.

There will also be a D-series available for self-directed investors.

The game changers combo offering.

On MoneySense and when we put together the Best ETFs in Canada, we often refer to the one ticket asset allocation ETFs as game changers. For use in the accumulation stage (wealth building) Canadian investors can hold comprehensive all-in-one portfolio ETFs with fees in the range of 0.20%.

And now enter the Purpose Longevity Pension Fund that might turn out to be the next piece in the game changing investment landscape.

  • Accumulation: one ticket
  • Decumulation: personal pension mutual fund

I’ll continue to do more research and I’ll add to this post. And I would invite reader questions. What do you want to know about this new offering?

I’ll get you the answers and I’ll add the responses to this post.

Thanks for reading. We’ll see you in the comment section.

Support your portfolio and Cut The Crap Investing.

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You will also earn a break on fees by way of many of those partnership links.

I also have partnerships with several of the leading Canadian Robo Advisors such as Justwealth, BMO Smartfolio ,Wealthsimple, Nest Wealth and Questwealth from Questrade.

Consider Justwealth for RESP accounts. That is THE option in Canada.

At Questrade, Canadians can buy ETFs for free.

I use and I’m a big fan of the no fee Tangerine Cash Back Credit Card. We make about $55 per month in cash back on everyday spending.

Make your cash work a lot harder at EQ Bank. RRSP and TFSA account savings rates are at 1.3%.

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Dale

Dale Roberts is the Chief Disruptor at cutthecrapinvesting.com. A former ad guy and investment advisor, Dale now helps Canadians say goodbye to paying some of the highest investment fees in the world. This blog originally appeared on Dale’s site June 1, 2021 and is republished on the Hub with his permission.

Projected Inflation and investment returns

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FP Canada issues guidelines every year to help financial planners make long-term financial projections for their clients that are objective and unbiased. The guidelines include assumptions to use for projected inflation and investment returns, wage growth, and borrowing rates. It also includes “probability of survival” tables that show the life expectancy at various ages.

The 2021 Projection Assumption Guidelines were of particular interest because, well, a lot has happened since the 2020 guidelines were published last spring. How should we project inflation and investment returns as we get to the other side of the pandemic and economies start opening up again?

Will we see sustained higher inflation? Should we expect any returns at all from bonds or cash? Should we lower our expectations for future stock market returns?

Remember, these are long-term projections (10+ years). That’s very different than guessing the direction of the stock market for 2021, or predicting whether we’ll see a short burst of inflation in late 2021, early 2022.

The inflation assumption of 2.0% was made by combining the assumptions from the following sources (each weighted at 25%):

  • the average of the inflation assumptions for 30 years (2019 to 2048) used in the most recent QPP actuarial report
  • the average of the inflation assumptions for 30 years (2019 to 2048) used in the most recent CPP actuarial report
  • results of the 2020 FP Canada/IQPF survey. The reduced average was used where the highest and lowest value were removed
  • current Bank of Canada target inflation rate

The result of this calculation is rounded to the nearest 0.10%

Projections for equity returns were set by combining assumptions from the following sources:

  • the average of the assumptions for 30 years (2019 to 2048) used in the most recent QPP actuarial report
  • the average of the assumptions for 30 years (2019 to 2048) used in the most recent CPP actuarial report
  • results of the 2020 FP Canada/IQPF survey. The reduced average was used where the highest and lowest value were removed
  • historic returns over the 50 years ending the previous December 31st (adjusted for inflation).

Equity return assumptions do not include fees.

Unlikely that bonds can replicate their projections of last 50 years

Projections for short-term investments and Canadian fixed-income returns included the assumptions from QPP and CPP, the results of the 2020 FP Canada/IQPF survey, but the 50-year historical average rate was removed in 2020 as a data source. This makes sense given that interest rates were significantly higher than they are now and so it would be impossible for bonds to replicate the performance of the last 50 years. Continue Reading…

Gold still trusted over Bitcoin, but gap is closing

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A report by LendEDU finds Bitcoin is making a lot of headway with investors over Gold. 56% said Bitcoin is a better investment to maximize profits, versus just 33% for gold. However, they still see gold as a better store of value against inflation, with 50% answering gold  (including 67% over the age of 54), and 39% saying bitcoin.

On behalf of New Jersey-based LendEDU, research firm Pollfish surveyed 1,000 Americans on April 21st to see how they would deploy an initial US$50,000 to build a retirement nest egg, and found gold only had a slight edge: 45% versus 42% for bitcoin. However, if the goal of the $50,000 investment is strictly to maximize profits, 49% specified bitcoin, versus just 37% for gold.

LendEDU Director of Communications Mike Brown says Bitcoin is up roughly 68,189,500% since its start in 2009, while gold is up 105% over the same period.

“Gold is proven as a reliable investment and safe haven against market volatility and inflation, which is especially relevant in 2021. Bitcoin is becoming a competitor for just the same thing, although its wild price fluctuations are not for the faint-hearted and attract a younger, more aggressive investor … We found gold is still trusted for more cautious investing, especially amongst older Americans, but bitcoin is closing that gap and is preferred for speculative investing, especially with the younger crowd.”

LendEDU’s Mike Brown

Brown says the survey results were “none too surprising; bitcoin has periods of monumental gain that make it a salivating buy for aggressive investors trying to make a profit. But it also has periods of monumental loss and faces constant regulatory and institutional scrutiny that make it a questionable buy if your first investment priority is protecting the money you already have.”

Gold, on the other hand, doesn’t have eye-popping surges like bitcoin but is safe and has historically delivered steady profits to the patient investor looking for a financial safe haven.

The survey reveals a younger bias towards bitcoin and an older population favoring gold. Thus, 56% of those between the ages of 18 and 24 thought bitcoin was the better speculative asset, while 29% thought gold was. The percentages were 29% and 55%, respectively, for poll participants over 54.

Similarly, 42% of the 18 – 24 cohort thought bitcoin was a better store of value to protect against inflation, while 44% said gold. For the over 54 cohort, those percentages were 16% and 67%, respectively.

Brown found the 35-44 age group surprising as they were quite bullish on bitcoin in all four questions and broke with the normal trend that had older respondents favoring gold and younger ones opting for bitcoin. “This could be due to this demographic getting in on bitcoin in the extremely early stages, around 2010 when they were in their mid-twenties or early-thirties.”

When asked if they have invested in bitcoin or gold recently amid concerns about inflation, 15% had invested in gold, 31% in bitcoin, 15% in both, and 36% in neither.

For retirement investing, gold still holds a dwindling edge

In another part of the survey, poll participants were given four increasing monetary values and asked if they would rather invest each value in either bitcoin or gold to build a retirement nest egg that they couldn’t touch until retirement. In nearly every scenario, gold was the preferred retirement investment choice over bitcoin. Only when $1,000 was the starting amount did more respondents (47%) want to invest in bitcoin over gold (43%).

But as the starting amount went up, so too did the risk, which is likely why respondents switched over to the less-risky, less-volatile gold to start building their retirement nest eggs as the questions progressed. As Brown notes, “Retirement accounts should be stable, and you’ll lose a lot less sleep investing $50,000 in gold instead of $50,000 in bitcoin.”

Even so, no matter the initial investment amount, most age groups preferred building their retirement nest egg through bitcoin rather than gold. For example, 46% of the 45-54 cohort wanted to invest $50,000 in bitcoin compared to 41% who said gold. Continue Reading…