Dealing with Longevity Risk is a “hot topic,” according to someone who’s an expert on the topic. Read this “as told to” interview with Moshe Milevsky, the prolific financial author and finance professor at the Schulich School of Business.
The risk is that as people go from savers (Wealth Accumulation) to relying on retirement income (Decumulation), there’s always the danger of running out of money before you run out of life.
There is of course a solution called annuities but for some reason both investors and their advisors aren’t yet flocking to them. This may be because it involves losing control over your capital to an insurance company and is an irrevocable decision, at least for the portion of your capital being annuitized. Another reason is it often means that capital won’t be available to one’s heirs, depending on the options chosen.
Interest rates low, but mortality credits on annuities become important as you age
Even so, Milevsky tells the site that “single premium income annuities are often under-rated as a retirement planning tool.” Yes, interest rates are low but Milevsky argues that as you get older, mortality credits become relatively more important. In the end, it’s all about peace of mind.
In any case, no one ever said you have to annuitize ALL your capital. Read Milevsky’s piece and you may conclude that at least some of your capital might be annuitized at some point.
Is the little birdie kicked out of the nest truly “Findependent?”
My latest MoneySense blog posted today carries the curious headline that most Millennials expect to achieve “financial independence” by age 27. I put “air quotes” around the phrase financial independence because of course it’s nonsense that merely leaving the nest and putting fewer demands on the Bank of Mum and Dad constitutes true financial independence.
Keep in mind that the research firm cited in the piece seems to use quite a different definition of Financial Independence than the one used at this site or as formally defined at Wikipedia. For research firm yconic, it seems financial independence means merely leaving the nest and landing a job that pays at least the monthly rent: they are merely “financially independent” of mum and dad.
Even with that loose definition, only 56% of older millennials (aged 30 to 33) say they have “achieved financial independence.”
With these savings rates, true Findependence for many millennials is a pipe dream
It’s just as well they’re using such a loose definition because the way the younger generation spends, it’s going to be a long long time before they achieve the kind of financial independence this blog describes.
To sum up the difference, I’d say “our kind” of Financial Independence is being able to stay afloat financially without the traditional source of single income known as “a job” or full-time employment. It’s quite a leap to go from moving out of the parental nest to being able to survive with neither parents nor an employer to keep those regular financial injections flowing into your bank account.
Far from being findependent, almost half the millennials surveyed (46%) admitted “saving money is a struggle” even if they are able to afford to pay the bills. A third say they are living paycheque to paycheque and are barely making ends meet. Fully 43% still rely on their parents for financial assistance, including 37% who look for help paying their student loans off. Does that sound like “our” kind of financial independence?
Non-saving millennials should find a Government job with a DB pension and stay there
I hate to break it to the non-savers but if they don’t start saving soon, they’ll never be able to achieve true financial independence. They had better be prepared to work until age 67 and be able to live on Social Security (in the US) or on the Canada Pension Plan, Old Age Security and possibly the Guaranteed Income Supplement (GIS), or find a good Defined Benefit pension plan somewhere and hang on to the job for three or four decades. (may as well try the Government first: their DB plans are most likely indexed to inflation and ultimately backstopped by taxpayers).
If there’s hope for them, it’s in the finding that most millennials hope to buy a home at some point. I like that because I always say the foundation of financial independence (our kind, that is) is a paid-for home. But even among those who already own a home, 32% got parental help rustling up the down payment. Among those who don’t, a quarter of them (24%) expect their parents to help them with the down payment.
Parents who have yet to kick the little birdies out of the nest might consider giving them a hint about what true Financial Independence entails by investing US$2.99 or C$3.37 in either of these e-books featured elsewhere on this site. Might make a great stocking stuffer! (Just gift the e-book via Amazon and maybe insert in the stocking a card telling them to check their Kindle).
Two of my seven eternal chestnuts of personal finance (from a MoneySense blog in August) is never to turn down “free money” from either Government or your employer.
In a piece in the Financial Post Wednesday Barbara Shecter reports on a Sun Life Financial finding that employees are not taking advantage of up to $3 billion in corporate pension plans and programs whereby employers “match” contributions.
Defined Contribution (DC) pensions can match top-ups that amount to between 3% and 6% of total earnings. Roughly a million are in DC pensions.
Remember, if your employer offers a company pension plan — especially if they will “match” your contributions — take them up on the offer!
My unplanned retirement at 52 seems to have been successful, if I look back over the last 15 years, but I could have done it better and suggest that you can too, if you have a plan.
Here is my story and the lessons I have learned. I am sharing them on the assumption it’s never too late for you or me to do it better. At age 52, I quit my day job and headed into the unknown. At that time I certainly did not call it “retirement.” It was more “seeking new opportunities,” time for a change of career plans” and other appropriate clichés.
How did I get to that point? Well, I was just another engineer/MBA with a career in corporate positions and management consulting, followed by twelve years in my own business. My computer products distribution enterprise grew quickly and did very well during the booming PC revolution of the ‘80s. Then in the ‘90s the PC market rapidly changed and smaller players were squeezed out by the few surviving big manufacturers, distributors, and retailers. So the business become less fun and less rewarding as I went through the challenges of a merger, wind-up, re-start and finally an exit. My decision to leave was based simply on the lack of personal satisfaction. The stimulating challenges and my motivation had evaporated. It was time to move on.
Inspired by The Wealthy Barber
During most of the 25 years after my MBA, I had earned good compensation and was apparently smart enough to manage a sound savings and investment plan (encouraged by the wise and practical advice of Jonathan Chevreau, the Wealthy Barber and many others.) The biggest bump in compensation and savings happened, of course, during the good years in my own business when sales and profits were booming. But when I quit working and starting searching for new opportunities there were two things missing: I did not know what I really wanted and I didn’t have a plan.
Financially, I was able to carry on without income and live off my investments. My savings and investment plans, starting in my early 30s, were based on reasonable risk and return assumptions in a well diversified portfolio. I started with a brokerage account and a commission-based broker. But after some poor advice and a couple of big losses, I switched to another broker for a few years, then finally decided to go 100% self-directed. I learned my choices were as good as those of the big brokerage research advisors and I now had the luxury of boasting about the winners and keeping quiet about my mistakes.
I remained cautious on 85% of the portfolio, although it was 95% in equities, as I could never justify the low returns of fixed income and was willing to be patient through the downturns. I often explain (usually to aggressive wealth management sales people) that my decision to continue to manage my own investments is not for the better returns, but for the education and entertainment value. Admittedly, sometimes an expensive education and sometimes more horror story than action-adventure.
Over the years, however, I had achieved acceptable average returns and at age 52 I could quit working and earning income. I could “retire.”
The Rule of 15
How did I know that? Being an engineer and MBA, I did have spreadsheets to run through various scenarios that showed I could live well and still leave an inheritance behind whenever I checked out. I even developed a simple “Rule of 15” that saves you all the trouble of preparing those spreadsheets. If you have fifteen times your annual spending invested, then you are good to retire. That’s it: if you need $50,000 a year to live on, you can retire on $750,000. That amount will take thirty years to decline to zero if you can earn at least 5% a year return on it.
The experts of course, will tell you it’s more complicated than that and you need to consider inflation and volatility of returns, housing, health and family issues. However, they are not predictable anyway and you have some room for error and the ability to manage within the 5% return and the 30-year time frame assumptions. Don’t make it complicated and suffer paralysis by analysis. The Rule of 15 is a simple reality check on your retirement plans.
But financial independence — findependence as Jonathan Chevreau calls it — is not enough. You may know how you are going to spend your money during your retirement, but how are you going to spend your time? That turns out to be even more important to your long-term health and well being.
Voluntourism
In my case, I meandered aimlessly into my unplanned retirement and tried to keep it interesting by dabbling in everything from Internet start-ups to building a consulting business; from running marathons to running for MP, playing golf to playing guitar. I dealt with some family issues, separated and divorced and did some voluntourism by helping entrepreneurs in developing economies and aboriginal communities.
After fifteen years of wandering between consulting, semi-retirement and self-unemployment, I recognized this approach was not giving me much satisfaction. I needed more passion and purpose in my life.
Since my own process clearly was not working, I started soliciting input and advice from professional resources to help figure out what I really needed for personal fulfillment. It began with a personal assessment of who I was and what I wanted. Better knowledge of myself helped me focus on what I should be spending my time on to achieve the goals of personal fulfillment. Clarity helps.
Here are the most important lessons that I learned in my unplanned retirement:
Do not make decisions by neglecting them until events decide for you.
Have a plan that recognizes your personal needs, goals, resources, limitations and timetable.
Assess who you are and where you are now; decide where you want to be and when; then start acting according to your plan. Hope for a little luck along the way, but don’t count on it.
About the Author:
DEL CHATTERSON is your Uncle Ralph.
He is dedicated to helping entrepreneurs to be better and do better.
Del is an experienced and successful entrepreneur, executive and consultant. As an entrepreneur, he grew his computer products distribution business from zero to $20 million per year in just eight years. His consulting company, DirectTech Solutions, provides strategic advice to business owners at all stages: from start-up through the challenges of managing growth and profitability to the exit strategies for management transition and business succession.
Del is an Engineer and MBA and has lectured on entrepreneurship and business management at both Concordia and McGill Universities in Montreal. He continues to share his experience and offers ideas, information and inspiration for entrepreneurs worldwide under the persona of “Uncle Ralph.’
Marr says the CRA is arguing that if investors use TFSAs for frequent trading and make large gains as a result, they are in effect running a trading business and should be taxed on any income so generated. A so-called TFSA audit program has been rolled out in recent years, according to the Post’s sources.
The CRA considers eight factors to determine whether the trading pattern constitutes a business; among them are frequency of transactions, period of ownership, securities knowledge, trading experience, advertising of the service and use of speculative securities.
Calgary-based law firm Moodys Gartner Tax Law LLP is said to be preparing for a legal fight with the government.
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