Personal Finance
As life changes, finances change
By Denise Deveau
As soon as she began her career in her 20s, Shelley Pringle was contributing to an RRSP. Back then it was a simple matter of putting a few extra dollars aside each month.
“I knew I needed to get in the game as soon as possible. But when you’re young, it’s hard to think seriously about it,” says the Toronto-based PR consultant. Marriage and a mortgage changed the investment picture once she hit her 30s.
“Other things took a higher priority. But as the years went on and the house was off the list of things we had to save for, we began to think more about our RRSPs,” she says.
Now in her 50s, she is “starting to take retirement more seriously.”
As investors change, so do their plans.
“Everyone is different. But everyone ages one year at a time,” says Gaetan Ruest, assistant vice-president strategic investment planning for Investors Group in Winnipeg.
The first stages of planning should begin in your 20s, a time when many are experiencing the changes that a new job, new income and in some cases new student debt bring. At this stage, retirement planning is barely in the picture.
Putting aside even a little bit of cash for your RRSP can go a long way, despite the temptation to spend all your new-found income, says Katrine Clark, financial advisor with Edward Jones in Vancouver.
“People need to get the message that starting early makes a huge difference in terms of compounding. It’s also a great time to take advantage of any company plans.” Mr. Ruest suggest trying to put aside about 10% of your income every month, including any company pension fund contributions.
“The earlier you start investing, the more time you have and the less money you need because you can allow it to grow over time.” Once you hit your 30s and 40s, things get more complicated and new realities set in. Family expenses, mortgages and careers become competing priorities for your hard earned dollars.
“Expenses go up and even if your career is going well, your disposable income is probably less,” Mr. Ruest notes. That’s the time to consider what’s most important in your planning he adds.
“You shouldn’t overlook paying down your mortgage or funding your children’s education. Hopefully you’ve put enough money aside in the early years to create significant growth in your portfolio and can take a break from contributions if you have to so you can meet your priorities.”
While there are many pressing things to spend your money on, you should still try to do what you can on the contribution front, Ms. Clark advises.
“It’s especially important in this time of your life to not lose focus on your retirement goals.” If all goes well, a 50-something will likely be at their peak earning years and nearing the end of their mortgage payment and supporting their children. With more cash flow, it’s time to get serious and play catch-up, Mr. Ruest says.
“You’re now at the final hurrah towards retirement. So you need to make sure you’re on track to meet your needs.And if you took a bit of a break in your contributions during your 30s and 40s, this is the time to make up for it.”
At this point, it becomes increasingly important to protect your savings. That means rethinking your risk tolerance and working on building a balanced portfolio, Ms. Clark notes. “You should be adjusting your portfolio and finding the best places to utilize the income.”
And even when your retirement date approaches, the planning isn’t over, cautions Mr. Ruest. “This is when you take any risk in your portfolio off the table. You need to be more defensive and conserve that value you built over the years by reducing your equity exposure. Don’t take risks with that nest egg, because it has to last a long time.”
Desperately seeking value
By Andrew Allentuck
These days, making a living in bank accounts or GICs, bonds or in stocks is tough. A bank deposit that pays a couple of per cent a year passes for a shrewd investment, even though what’s left after tax and inflation may be next to nothing. That’s the dilemma for investors who can try to get a return or try to find a manager who will do it for them.
“Interest rates on fixed-income investments are so ridiculously low that you can’t even consider them as a viable option for your future financial security,” says Bill Beatty, an Edmonton-based telecommunications company manager who hopes to retire in seven years or less and prefers not to take big risks with his money.
“I think we’re forced to rely on money managers who, we hope, can make up some money.
Trouble is, finding those managers is very hard. And paying them is a gamble.”
That’s the dilemma: Find a manager who may or may not be worth his fees or save the fees and risk being pennywise and pound foolish. After all, a couple of bad days in the market can cost more than a few per cent paid to a manager.
“The picture of what mom and pop investors have achieved in this market is bleak,” says Dan Hallett, director of asset management for HighView Financial Group in Oakville, Ont. “Individuals trade too often, give up too much return in fund and trading fees and taxes, make bad timing decisions, and generally underperform the
market.”
Unfortunately, fund managers on average have not done a lot better than markets.
For example, Canadian money market funds posted an average 0.42% return for the whole of 2011. That rate would have generated $ 420 before tax. At least that was a positive return.
The S&P/TSX Composite Index lost 11.1% in the year. Even balanced mutual funds that are constructed to reduce risk lost 3.9% in the year.
Some managers add value to market returns. James Hymas’s Toronto-based Malachite Aggressive Preferred Fund, for example, produced a 14.8% average annual gain for the five years ended Jan. 31, 2012 vs. the 4.15% average annual gain of its benchmark, the BMO Capital Markets 50 Index.
His fees, which start at 1.34% of net asset value and drop as amounts invested grow, are below average.
His style is the rigorous fundamental analysis used for fixed income assets – balance sheets, study of corporate capital structure, and a good deal of what one might call iconoclastic beliefs in the market. His territory, preferred shares, is usually ignored by other managers. But his returns show that a maverick manager who does not follow the market can perform well for clients.
But if you look at the overall market, only a handful of managers have the skill to do well for their clients, says Som Seif, president of Claymore Investments Inc. in Toronto. “The rest don’t do well or are inconsistent.”
Retail investors know they need guidance. The quest is therefore to find a manager who justifies his or her fees. The average fee on equity funds is 2.5%. The average fee on bond funds is 1.5% per year, enough to confiscate most of what little interest government bonds pay.
It has to be said that not every investment goal needs a manager. If an investor wants nothing more than a 10-year Government of Canada bond to provide a sum of money known to the penny every year to maturity in 2022, there is no need for a manager, says Caroline Nalbantoglu, a registered financial planner who heads CNal Financial Planning Inc. in Montreal. “You just buy the bond and hold the position until maturity. You have the guarantee of the government and the certainty of getting interest precisely on schedule. It does not pay much, but there is no risk of default.”
There is a middle ground for investors – exchange traded funds – where fees and performance are in a potentially reasonable balance.
A new generation of index funds tries to maintain the advantages of active investing, selecting stocks for various merits such as free cash flow per share, says Mr. Seif.
That puts the fund in a space between traditional active management in which managers follow themes or their favourite valuation models and the low costs of passive investing in index funds. The new generation can add value to index funds, he says.
The Claymore S&P/TSX Canadian Dividend ETF (CDZ-TSX) returned 19.19% per year compounded annually for the three years ended Dec. 31, 2011 compared to the S&P TSX 60 total return index, which gained 10.95% in the same three-year period.
Over three years, the fund had a cumulative return of 69.32% compared to the 36.58% cumulative gain of the index. Its management fee, 0.67% per year, is about a fourth of the 2.5% average annual fee for managed stock funds.
In the competitive fund and ETF market, it is essential to look at track records to find not just hot recent performance, but consistent performance. It is an old saying that managers who take the risks that will put them in the top of rankings sometimes wind up at at the bottom. Look at fees and compare the costs with those of peers. Over time, fees shift a lot of gains to managers, Ms. Nalbantoglu notes. “The point of hiring a manager is to get value for fees. That is at least as hard as picking stocks.”
Canadians expect to work past 66: survey
Most Canadians expect to work past the age of 66 — and the majority of those workers say it will be because they need to, not because they want to, a new survey suggests.
As the federal government tries to sell Canadians on changes to Old Age Security, a survey by Ipsos Reid for Sun Life Financial has found that only 30% of Canadians expect to be fully retired at 66.
Those expectations come as the federal government plans to tinker with Canadians’ social safety net.
There has been speculation the Conservative government will push back the qualifying age for Old Age Security to 67 from 65.
The Ipsos Reid survey released Wednesday showed that among respondents who said they expect to keep working, 61% will do so because they need to.
“These results are not surprising given the current economic volatility, increasing consumer debt loads, rising health-care costs, longer life expectancy and lack of planning,” said Kevin Dougherty, president of Sun Life Financial Canada, in a statement.
“We’re also finding that some Canadians believe they’ll have to work longer to be able to pay for basic living expenses.”
Concerns about the economy were prevalent among those surveyed. Nearly half — 47% — said they are worried about the debt they’ll be dealing with as retirees.
Many surveyed said they’re expecting retirement to be something they enter gradually, rather than simply giving up their careers all at once.
“Interest in phased retirement has been growing,” said Ian Markham of Towers Watson, a human resources consulting firm, in the statement released with the poll results.
Of those surveyed, 43% said they’ll start to phase in their retirement between the ages of 60 and 65, working either part-time or freelance before they fully give up work.
Twenty-one percent said they hoped to start retirement between the ages of 50 and 59.
But there were 8% who only expected to start pulling back from work between the ages of 66 and 70.
“Baby boomers are looking at (phased-in retirement) as a way to prolong their careers, pay off some debts and make a smooth transition into retirement,” Markham said.
“Having additional income during this transition creates an additional financial safety net for Canadians — which we’re seeing as increasingly important in today’s economy.”
The Ipsos Reid poll was conducted online between Nov. 29 and Dec. 12, and 3,701 working Canadians between the ages of 30 and 65 were surveyed.
Ipsos weighted the results to make them reflect Canadian demographics.
A survey with an unweighted sample of this size and a 100% response rate would have an estimated margin of error of 1.6 percentage points, 19 times out of 20, according to the poll.
Time to discuss retirement
By Moshe Milevsky
You might be surprised to hear that this year’s RRSP season is the worst possible time to make an RRSP contribution.
Money inside an RRSP grows tax sheltered until you withdraw the funds. The sheltered growth is one of the two great reasons to participate in the program. The second is the tax deduction, which leads to a nice refund in springtime. But, when you think about it carefully, the contribution for the 2011 tax year could have been made as early as January 1, 2011. That money could have grown tax sheltered for the past 14 months. And, if you didn’t know how much you could contribute until the CRA informed you after filing in spring 2011, you should have made the contribution then.
So is RRSP season misguided? I don’t think so. In my mind, the benefit of RRSP season is the inevitable conversations about retirement they generate — something that might be as important as the money itself. The advertising reminds Canadians about the looming milestone in their life.
To get those conversations started, here are some talking points.
1. How long will your RRSP (a.k.a. retirement nest egg) last, if you were to stop contributing today, and instead withdraw a fixed amount each year while earning a fixed interest rate? Although neither of these fixes is realistic in practice, this sort of analysis provides a sobering assessment of whether and when you can afford to retire. The underlying mathematics of this calculation is trivial and does not require any complex retirement planning algorithms. In other words, you — or your financial advisor — can’t hide behind optimistic projections.
2. Given your family history, current lifestyle and recent medical events, what are the chances that you, your spouse, or both of you, will reach the age of 90, 95 or even 100? Go online, talk to a medical professional, consult an actuary and learn the odds. In other words, get to know your longevity risk.
3. Does your company offer a true pension? Dig deep into the mechanics of your employer’s retirement plan. Many are called pensions but are basically pooled savings. If you don’t have a pension — a promise of real lifetime of income — then consider buying one, eventually.
4. How important is it for you to enjoy your money now versus later? The industry talks about replacing 70% to 80% or your income in retirement. But do you want the exact same standard of living regardless of how long you live? Or are you willing to scale back and instead enjoy the money earlier on? This is your subjective time preference. One size doesn’t fit all.
5. How comfortable are you with stock market risk? The past 10 to 15 years have taught us that time doesn’t necessarily diversify away risk. Stocks — which fluctuated more than bonds — earned less than bonds during the past 25 years. Whether this persists in the years ahead is debatable. But if stocks continue their lacklustre performance — and the economy sputters — will this impact your job? In the language of financial economics, is your human capital and financial capital intertwined? If so, you might want to lay off the stocks in your RRSP. Asset allocation should involve your entire balance sheet.
6. What do you plan to leave the kids? Is this a priority for you? I have seen many people who are close to or in retirement who dedicate a particular account, asset or sum for their loved ones. For example, it is not uncommon to hear that the house is going to the kids, or that the GIC will eventually go to the grandkids. This is commendable, but is it financially efficient? If legacy is your motive, you might want to see what life insurance can do for you. And vice versa, if you have life insurance – paid up or not – but need the money earlier, then you might want to think about giving it up.
7. Finally, the last topic is one best done with a financial advisor who has the requisite technology. Have the advisor run a so-called sustainability and stress a nalysis of your long-term financial plan. This takes account of your asset allocation, your pensions, your longevity and everything else on your personal balance sheet. Get a summary of your financial health.
In sum, although this season might not be the best time to make your RRSP contributions, it is the season to talk about retirement. That I have no quibble with.
- Moshe A. Milevsky, PhD, is a professor at the Schulich School of Business at York University in Toronto. He is the author of the forthcoming book The 7 Most Important Equations for Your Retirement – and the Stories Behind Them (Wiley, 2012)
Working Retirement: A retiring wine expert
By Bev Cline
Born in Italy, Vito Nardiello has always had a fondness for the wine culture of his homeland. Over the years, Mr. Nardiello, of Coquitlam, B.C., learned about fine wines as a hobby. He took courses, read books and tried hundreds of wines.
Yet he never expected that when he retired from his customer service position at Air Canada, he would be able to put that knowledge to use as a representative for an expanding Calgary-based company importing and distributing wine.
“I’m very focused on customer service, which, to my way of thinking, is no different in any industry,” says Mr. Nardiello, who retired in May 2010. “Always listen to the client, always help the client to achieve their goal,” he says, noting that in 25 years with Air Canada, he took only two sick days.
After retiring, Mr. Nardiello, 57, went to Italy for four or five months with his family to visit relatives. He returned to Canada and a life he characterized as “very, very boring.” He knew very shortly thereafter that “it was a big mistake to retire without at least a part-time job in a field I would enjoy.”
Mr. Nardiello had operated an Italian deli for four or five years with his wife and family during his time at Air Canada. So he looked for part-time work in the restaurant sector. He also explored the customer service sector. He wanted something different from what he had been doing for so many years. So he started contacting friends and former colleagues as he searched for interesting opportunities.
The answer came in a conversation about retirement with the daughter of one of his former bosses. She owns a company in the wine business and offered Mr. Nardiello the position of representative for Galileo Wine & Spirits Ltd. for British Columbia. The position, which he undertook in October 2011, “lets me share my knowledge of wine and be my own boss; it’s perfect,” he says.
Mr. Nardiello’s schedule includes a number of travel days, driving from client to client. The long travel days suit him perfectly, balanced off by the ability to work from home the rest of the time. “This is not a Monday-to-Friday job,” he says. “It’s up to me to set my own schedule and up to me to figure out how to achieve my own goals.”
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