Finance Minister Joe Oliver (Department of Finance/Flickr)
By Jonathan Chevreau
Journalists and financial experts will be entering a “Lock-up” this morning in Ottawa, getting roughly a six-hour head start on the rest of us on the contents of the 2015 federal budget.
Even so, a combination of leaks and informed speculation give us a pretty good idea about the contents, which will gush forth within seconds of 4 pm, when the embargo is lifted.
Here at the Financial Independence Hub, we will be focusing on three main measures that if announced will do much to speed or improve our collective “Findependence.” Our hoped-for “trifecta” from Finance Minister Joe Oliver (pictured above) includes the much-delayed promise of a doubling of annual TFSA limits, a lowering of minimum withdrawal limits for RRIFs, and lower tax rates for small business. Continue Reading…
President Underwood wants to take away your Social Security
By Jonathan Chevreau
If you’ve been binge-watching the new third season of House of Cards on Netflix, you’ll know that the nefarious Frank Underwood — now the fictional president of the United States — has decided Social Security is a luxury the nation can no longer afford, as is Medicare and Medicaid.
Probably not, but there’s been a lot of online commentary on the very notion of killing the 80-year old Social Security program, given how many Americans have little retirement savings resources other than it. One is this piece from the Independent Women’s Forum, entitled House of Cards gets Social Security policy right, but messaging wrong.
If the prospect of losing Social Security doesn’t frighten you, maybe this will: New York Times reports that many Americans will run out of money in retirement unless at least two things happen: one, they need to save more, and two, what money they do need to save needs to be invested more wisely, which means avoiding high-fee mutual funds. It blames mutual fund expense ratios of 1.12% of assets and that’s in the United States. Canadian mutual fund MERs are roughly twice that high.
So the solution is to just keep working, perhaps in an Underwoodian variation of AmWorks? Not so fast! Personal finance author and columnist Helaine Olen writes an insightful piece in Slate on what she calls the “Semi-Retirement Myth.” As the online site puts it, “Don’t buy the tales of meaningful work into your 70s. Your retirement is inevitable — and bleaker than the last generation’s.”
Better hope for “Freedom Six Feet Under.” Unfortunately, as the Hub’s Longevity & Aging section continually reminds us, odds are we’re all going to be living longer and healthier than we once may have imagined. Perhaps the canary in the coal mine is Irving Kahn, who passed away last week at age 109. One of the world’s oldest active investors, Kahn was around to experience the crash of 1929. Here’s the obituary from the Telegraph.
On the same subject, sadly comes news of the death of Thomas Stanley, co-author of the groundbreaking bible of personal finance, The Millionaire Next Door. Here’s a good tribute on him from the New York Times.
Globe & Mail on Reforming Retirement
North of the border, the Globe & Mail has been running a series on reforming retirement. Last week it weighed in to the TFSA debate. Continue Reading…
Ah, life was so simple when all we had were Defined Benefit pension plans! I sometimes envy my late father, who only had to invest in GICs (Guaranteed Investment Certificates) to supplement his inflation-indexed Ontario Teachers pension. Just like a salary, that guaranteed pension flowed in like clockwork, including a healthy survivor’s benefit after my father predeceased my mother.
Unfortunately, such pensions do not pass to the next generation and it’s becoming harder to find employers that offer new employees DB plans: even if you’re fortunate enough to be in one, you may be subjected to pressures to switch to a Defined Contribution Plan, putting stock-market risk squarely on the pensioner’s shoulders instead of the employer’s.
Decumulation Issues similar with RRSPs and RRIFs
Since RRSPs behave quite similarly to DC pensions, the issues are almost the same, both on the wealth accumulation side as well as what we call the Decumulation side. (Here at the Hub, we have sections devoted to blogs on either topic).
Unlike DB plans, members of DC plans need some employer-supplied education so as to optimize both the wealth accumulation as well as the ultimate decumulation that is the ultimate raison d’être of any pension. Por says an OECD study found most employer communications programs about DC pensions were rather ineffective in improving the behaviour of the plan members when it came to investing decisions. The average score of such programs was only 10 out of a maximum 100. (a range of 50-60 is considered effective).
Anyone near retirement and without significant income from old-fashioned DB plans well knows the stress of seeing RRSP or RRIF values fluctuate with financial markets. As Por notes, one reason for the disappointing DC scores is this:
Plan members are expected to make complex decisions about an uncertain future … Members are expected to make the same or even more difficult decisions as chief investment officers (CIOs) of large pension funds.
His fifth point is also instructive:
Educators fail to recognize the inherent challenge of overcoming limitations imposed by human nature, such as people’s hard-wired biases and heuristics.
Most DC plans do a good job educating members in the Accumulation years. Por says default options can guide more than 80% of members to a well-diversified efficient portfolio at low costs. But it all breaks down just when the money is needed at retirement:
Unfortunately, much of this support disappears at the decumulation decision— the very point where complexity explodes. Yet 60 cents of every retirement dollar are paid by returns earned after retirement as the direct result of decumulation decisions.
Por delves into behavioural economics, noting that one reason retirees shy away from annuities is that they “discount” the value of the tradeoff involved in converting capital to long-term secure income stream that should last 20 or 30 years.
While Por’s focus is DC plans, remember that the decumulation issues are also quite relevant for those planning for the transition from RRSPs to Registered Retirement Income Funds (RRIFs). But with 9 million Canadians set to retire in the next 15 or 20 years, he’s optimistic that employers and financial institutions will rise to the Decumulation challenge:
Canadian society will produce 1,500 retirees every working day for the next 20 years, and financial institutions have an overriding interest in serving them. As these institutions vie for asset decumulation, competition will result in better financial products and more effective education efforts.
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