All posts by Jonathan Chevreau

The Fatal Flaw in Most Retirement Plans

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Here at the Hub we make a big distinction between Wealth Accumulation and its mirror image, Decumulation. Decumulation is all about drawing an income from your investments and pensions once you’ve stopped working full-time. The mindset is quite different from working and saving to invest.

We plan to run a number of contributors by guest experts on Decumulation. This is the first of what we hope will be many contributions by certified financial planner Doug Dahmer (pictured), founder and CEO of Emeritus Retirement Income Specialists.

dougdahmer
Doug Dahmer

By Doug Dahmer

Special to the Financial Independence Hub

There is a critical issue that continually arises that people don’t tend to think about when it comes to their retirement planning. I’m not discussing their retirement income requirements, retirement age, accumulated assets, government benefits or even their expected rates of return, though those are all important. What’s often ignored is their life expectancy.

Your life expectancy is probably a more important decision than deciding how close you are to retirement. Yet the latter is what the focus is put upon.  Deciding this critical factor then allows you to consider other important things like where are you going to live and for how long will you live there?  When should you downsize and when should you consider a retirement home?

Also consider your spouse’s life expectancy

Don’t forget to consider the life expectancy of your spouse – the disparity between your two longevities can have even more significant implications to your planning. How should you split incomes and which assets you should draw from first?

Longevity has increased thanks to medical advances and the fact that many boomers have adopted better lifestyles that often allow them to celebrate their 100th birthdays. However,  many variables play a role in how long you may live. These include reducing stress, genetics, eating healthy, exercising and even being married. While we would all agree that living a long life is a good thing, it is important that each individual is prepared for the financial consequences of their longevity.

When Canada set the retirement age, almost a half century ago, at age 65, life expectancy was approximately 72 years old. In a report from Statistics Canada, the average life expectancy for a 65 year old man in 2009 was 83.5 and for a woman it was 86.6. Remember, this is the average, which means over half the population will live longer than this.

As you can’t see into the future, it’s unclear exactly how long you’ll live in retirement; however there are superior ways of estimating  this rather than simply making a guess based on how you feel about yourself on any given day.

The Longevity Game

A fun, easy and free way to accomplish this is to visit The Longevity Game website, courtesy of Northwestern Mutual Life Insurance. By completing the questionnaire, you will receive a life expectancy calculation tailored to you, generated by factors like your levels of stress, lifestyle habits, current health and family history.

In a recent report by the Society of Actuaries entitled ‘Key Findings and Issues: Longevity,’ it has been revealed that more than half the population undervalues their life expectancy. As a result their retirement planning time horizons are much too short.

Preparing for the ‘No Go’ Years

If you overestimate your life expectancy, you’ll leave your heirs with a little bit extra. However, if you underestimate your life expectancy, you could end up running out of money and having inadequate resources to secure your dignity and independence during your ‘No Go Years’.

According to the report from the Society of Actuaries, “As in 2009, retirees say they typically look five years (median) into the future, while pre-retirees typically look 10 years (median) ahead when making important financial decisions.”

For most, a big part of retirement planning is making sure your money lasts as long as you do, so to avoid a fatal flaw in your retirement planning it would be a good idea to start with a better understanding of how long each of your journeys may last.

Doug Dahmer is CEO and founder of Emeritus Retirement Income Specialists, based in Burlington, Ont. 

 

Mortgage financing costs rising for some first-time home buyers

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expensive houses from euro banknotesMortgage costs may rise  up to $600 for typical first-time home buyers, the Financial Post reported Friday. Garry Marr says Canada Mortgage and Housing is tripling the fee it charges to guarantee loans in the mortgage-backed securities market.

Marr suggests the move is consistent with Ottawa’s goal of cutting back its role in mortgage insurance but may also help to put the brakes on an overheated housing market. As Terence Corcoran reports in another column, the Bank of Canada has suggested the Canadian housing market may be overvalued by up to 30%.

For a typical mortgage of $250,000 for a first-time home buyer, Marr quoted a source who estimated the extra cost will be as much as $600.  It could mean a jump of up to 10 basis points on a five-year closed mortgage. The changes are effective April 1, 2015.

Those with less than a 20% downpayment are required to get mortgage default insurance if borrowing from a federally regulated financial institution.

Marr says that among the moves Ottawa has taken to cool the red-hot housing market has been to lower mortgage amortization rates from 40 years to 25 years.

How Behavioural Biases Stopped Me from Becoming an Indexer

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We’re delighted to run the first of what we hope will be many contributions from the popular Boomer & Echo blog.  The topic is something I suspect many investors can relate to if they have an intellectual understanding of the powerful reason for indexing but are unable to fully commit to it because of the behavioural biases Robb Engen so eloquently describes. Robb is the “Echo” part of Boomer & Echo and you can read all about him here.  The piece originally ran in September. Link to the original is below.

robb-engenBy Robb Engen, Boomer & Echo

Special to the Financial Independence Hub

I’ve spent the last five years convincing myself – and many of you – that I’m a sophisticated do-it-yourself investor with a sound strategy that will outperform the market over the long run.

My dividend growth investment approach has indeed performed well, returning over 16% per year since 2009. But the stock market in general has also been red hot over that time. It’ll take another bear market cycle to determine whether my investment returns were skill, luck, or something in between.

In the meantime, since launching our fee-only planning business earlier this year, I’ve been recommending a couch potato investment approach to anyone who’ll listen. I truly believe that 99% of investors would be better off indexing their portfolio with three or four low cost, broadly diversified ETFs.

Related: Why investors should embrace simple solutions

So lately I’ve started to wonder, what makes my situation so special? Why stick with a strategy that I don’t even recommend to my clients?

The answer lies in a whole bunch of hidden behavioural biases that cloud my judgement – framing, recency bias, home country bias, and overconfidence.

Framing

It’s difficult to part ways with a successful investing approach.  Selling a portfolio of winning stocks – my babies that I’ve nurtured through this five-year bull market – just doesn’t feel right. But if I were sitting on $100,000 in cash instead of stocks I’d have no problem starting a couch potato portfolio today.

Recency bias

As the bull market rages on and my investments continue to perform well, it gets harder and harder to recall what a bear market feels like and what I might do if my investment returns start to lag my benchmark.

Related: How are your investments performing?

This year my portfolio has trailed its benchmark by about one per cent – not huge, but enough to make me pause and reconsider my approach.

Home country bias

When I started my DIY portfolio, I bought the 10 highest yielding stocks on the TSX. While I’ve refined my stock-picking approach since then, I’ve stuck with Canadian dividend payers even though Canadian firms make up a tiny slice of the global economy.

Making matters worse, instead of keeping my Canadian dividend stocks in a TFSA or non-registered account, they’re held inside my RRSP. Not an optimal strategy when it comes to tax efficiency.

Overconfidence

It’s hard not to be overconfident when you’ve beaten your benchmark by a full 3% per year over the last five years. But even the best investors will eventually suffer periods of underperformance.

Related: 5 lessons learned about investing

Why wait for that to happen before accepting the inevitable? Indexing gives me the best chance of achieving my investment goals over the very long term.

No shame in becoming an indexer

Norm Rothery had a great piece in the Globe and Mail in mid-September about a DIY investor whose U.S. stock picks had under-performed the market by a good 3% per year since 2007. The investor decided to stop picking U.S. stocks and move to index funds instead – opting for Vanguard’s FTSE All-World ex Canada ETF (VXC) to get his U.S. exposure.

Rothery goes on to write:

Scott’s decision to stop picking U.S. stocks is an uncommon one. Most self-directed investors remain far too confident in their abilities for far too long. Instead, disappointing long-term results are often attributed to misfortune or peculiar circumstances rather than the lack of a competitive edge.

There is no shame in admitting that you’re not the next Warren Buffett. The vast majority of investors aren’t. Those who figure it out are likely to improve their returns dramatically by following simple low-cost mechanical methods such as investing in low-fee index funds.”

Speaking of Buffett, the ‘Oracle of Omaha’ has famously touted the benefits of a low cost, broadly diversified investment approach, saying that most investors would be better off in an index fund rather than trying to beat the market by picking stocks or actively managed mutual funds.

Final thoughts

The more I read about, write about, and teach others about investing, the more I’m convinced that passive investing is the right approach.

It’s not that I stopped believing in a dividend growth strategy – it’s a fine approach that many investors will have success with – but it’s not ideal for my RRSP.  And frankly, the time and effort needed to manage it properly may not be worth it in the long run.

I suspect it’s only a matter of time before I pull the trigger and become a full-fledged indexer.

Robb Engen is a fee-only planner and personal finance blogger at Boomer & Echo. He lives in Lethbridge, Alberta with his wife and two children.

This article  originally ran in September of this year.  Even if you read the Hub’s version above, it’s worth clicking through to the original to read the more than 60 comments appended to it.

Don’t let Taxman’s crackdown stop you from maxing out your TFSA

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My latest post at MoneySense.ca is headlined “CRA TFSA crackdown no cause for alarm.” Click through for the full piece. While you’re at it check out this post from the Hub recapping Tuesday’s one-hour live web chat with myself and Financial Post columnist Garry Marr, who has been breaking the stories about the CRA’s crackdown on excessively traded humungous TFSAs. The crackdown drew plenty of comments and suggestions.

For one-stop shopping purposes and convenience, I reproduce below the original text for my MoneySense blog on how investors should react to this crackdown.

Only minority targeted in CRA crackdown; keep maxing out your TFSA early in January

By Jonathan Chevreau

Woman frightened by taxesTax Free Savings Accounts (TFSAs) have come in for a drubbing lately, based on various media reports of a CRA “crackdown” on frequent traders who have racked up excessive gains.

On social media there seem to be a lot of ordinary investors taken aback by this, even though as I have said on Twitter, 99.99% of the almost 10 million Canadians who have a TFSA hardly need to worry about this obscure attack on a few sophisticated frequent traders of speculative stocks in their accounts.

Anyone who holds index funds, ETFs, blue-chip stocks or fixed income and is holding for the proverbial long term should stick with their plans for using their TFSA, including making a full maximum contribution early in January. Frequent online traders making dozens of trades a day are the target, especially if their trading patterns causes the CRA to view them as running businesses inside their TFSAs: if you or I traded that often we’d be losing a lot in trading commissions, even at the $5 or $10 a pop that most online brokerages charge.

As I have also pointed out, TFSAs are the mirror image of the RRSP, which has been around more than half a century. Even if there is a way to define what an “excessive” gain is, does this mean Ottawa would go back through half a century’s worth of deferred RRSP gains? It seems hardly likely.

TFSA remains best game in a highly taxed town

This is really a tempest in a teapot and I’d hate to think anyone scared off by this would fail to top up their TFSA early in January. As I’ve also said more than once, the TFSA is just about the best game in an otherwise highly taxed town. And as I said in this blog a few weeks ago, the uncovering of an end run that lets the wealthy contort their finances so as to collect for three years the Guaranteed Income Supplement (intended for the elderly poor) suggests that either GIS or TFSA rules or both may get tinkered with sometime in the next few years. So it’s best to fill up TFSAs while you can, just in case Ottawa starts to curtail their use for whatever reason. And that includes maximizing your children’s TFSAs if you’re able.

To be safe, check the CRA’s 8-point audit list

The Canada Revenue Agency has rolled out an 8-point list for a TFSA “audit” but a quick scan of the items should reassure ordinary investors that there’s little cause for alarm. I can see how some knowledgeable do-it-yourself investors who love to research stocks and spend time at their trading terminals might feel a bit uncomfortable but it’s pretty clear the CRA is more worried about those who make many (10 or 15 a day) trades and who quickly liquidate their positions. Also on the list are speculative non-dividend paying stocks, people who use margin or debt to leverage their positions, and those who advertise their willingness to purchase certain securities: again, well outside the realm of the ordinary investor trying to create a little tax-free dividend or interest income.
For most TFSA holders, danger is lack of capital gains not excessive ones

 

The irony about all this attention to a handful of professional speculators gaming the system for spectacular capital gains is that far too many TFSA users are doing the precise opposite. If all you do is go with a default GIC or low interest-bearing investment in your TFSA, then you’re not doing this vehicle justice. Chris Cottier, a Vancouver-based investment adviser with Richardson GMP, says any young investor with large debts – especially high-interest credit-card debt – should forget about TFSAs until they’ve eliminated that debt.

Very few investments can create gains greater than those accruing to those who pay off credit-card debt that approaches 20% per year.
But when are debt-free (except the mortgage), you’ll be better off holding equities in your TFSA than fixed-income investments sporting today’s minuscule interest rates.

MoneySense has long espoused a passive “Couch Potato” approach to investing in broadly diversified portfolios spread over geographies and multiple asset classes. That approach is particularly apt for TFSAs and is clearly the polar opposite of the type of investor the CRA is looking for.

So when January rolls around, do not hesitate to max out your TFSA contribution for the year 2015 and if it’s a quality ETF from a well-established manufacturer, I wouldn’t waste a minute’s thought on the CRA.

Jonathan Chevreau is Chief Findependence Officer for FinancialIndependenceHub.com.

ING vs. Tangerine: two years since the Buyout

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Danielle Kubes, Pretty Little Poor Girl

By Danielle Kubes,

Special to the Financial Independence Hub

I haven’t noticed many changes since Scotiabank bought out ING Direct in 2012, except for two:

  1. They changed the name to Tangerine

Why did they do this? Is it a fruit? Is it a colour? WHY? People like my parents already think ING is a fake bank that will steal all my money: calling it something as light and fluffy as Tangerine does not help my case that it is a real bank with real interest rates, and that banks with tellers and real estate are as 20th century as AOL.

I will forgive them, however, because CEO  Peter Aceto told Canadian Business that they weren’t allowed to use the name ING anymore. Here’s the rationale behind that decision:

“Simplicity” and “innovation” were two things the bank wanted to come across in its new name—the idea was to hearken back to its earlier days (being an alternative, simplified place to do your banking), but push the brand forward at the same time. The name Orange was considered on the shortlist, but was considered to be “too safe or obvious of a choice.” Tangerine makes reference to ING Direct’s orange history, (Ed Note [DK]: by orange history, do they mean just using the colour orange? How does a bank have colour history?) while also being significantly different.

Aceto says part of the branding discussion also took into account the more “fun” aspects of the name.

“We understood the risk that a name like that could be interpreted as being silly, or not serious,” he says. “Banking is important, it’s serious. We’re asking you to give us your life savings, or to help you buy a home or invest.”

That’s why there won’t be any references to fruit in any of Tangerine’s advertising materials or promotional campaigns. The fun name “does a lot of work for us” in sparking interest in Tangerine, Aceto says, but service at the customer level needs to be thoughtful and earnest in order to build a client base.

“I want people to think, oh, they’re different. They’re not like everyone else.”

 

  1. tangerine-ing-direct-debit-interactThey changed the debit card by making it flimsier and WRONG

Writing the bank name horizontally across a debit card made sense when we signed for things.

Now we use a chip and PIN# method of payment. The chip is always entered vertically.

So why, on all debit cards, is the bank name still horizontal?

ING was the only card to write its name vertically, which was logical and made them seem the most current.

With the buyout, it has gone backwards and written its company name horizontally.

Also, while you can’t see this in a picture, the new card is very flimsy and bendy. It’s not really a problem but coupled with Tangerine it just kind of makes the bank seem flimsy.

Now, these are all  personal pet peeves that have no affect on how they do business; banking  with them hasn’t changed. They don’t have the best interest rates anymore; that award would go to credit unions in Western Canada, but they are still way better than the Big Five banks and they also have lower fees (no fees!) than the credit unions.

All in all, it’s still my favourite Canadian bank with which to do my daily banking, but it’s no longer my favourite choice with which to invest in GICs, which will be the subject of another  post.

Here’s how this article originally appeared at Danielle’s Pretty Little Poor Girl blog. And you should click on the link because apart from Danielle’s awesome slogan, she includes an extra paragraph at the bottom of her original post that further teases the good folks at Tangerine: JC.