Nevada Retirement Planners

Shaky financial markets are causing recently retired Canadians to feel less secure about their retirement, a Fidelity Investments Canada poll finds. The third annual Fidelity Canadian Retirement Survey, released today, finds only 39% of retirees are finding their transition into retirement easier than they expected, down from 48% a year ago. The Strategic Counsel polled 1,000 Canadians aged 45 or older between late November and early December of 2007. 

Not surprisingly, Canadians are most likely to launch their retirement during the summer months of June, July and August. "When you consider the relatively short summer Canada enjoys, it seems that retiring Canadians want to take full advantage of the summer months by not spending them at work," said Peter Drake, Fidelity Canada's vice president of economic and retirement research. Unfortunately, it was last August when the problems apparent in the subprime mortgage market first started to become visible, with an impact on financial markets that continues to reverberate today.

Despite the inclination to retire in summer, 36% did not celebrate the event by doing anything special. Fidelity attributes this to the fact that 40% of retirees reported continuing to work after retiring. Still, the majority did celebrate in some fashion: 31% through company parties, 18% through parties thrown by family or friends, 14% by taking a trip  and 12% by starting a new hobby.  

One in seven retirees began their new life of leisure by meeting with their financial advisors. 

Tight-lipped about money

Fidelity found Canadians are for the most part tight-lipped about how much money they've saved for retirement: 26% of non-retirees and 32% of retirees report that while they have have thought about it, they had not discussed the amount with family, friends or even their advisor. Those not yet retired but who planned to fund their future retirement
from their own savings were more likely to talk about how much money
they had saved with their advisor (60%) than with family or friends
(46%);  On the topic of generating retirement income, 55% are more likely to discuss these issues first with their advisors, versus 45% who would first consult family or friends. 

Drake says talking about retirement savings should be one step ahead of planning for it. "Not talking, or worse, not planning for retirement can make things even more difficult."

While many pre-retirees have a plan on how to build their nest eggs, few have a plan on how they will draw income once they do retire. As was the case a year ago, Fidelity finds only 23% of Canadians report having a retirement income plan. However, those that do have such a plan report that they are considering such factors as future health care expenses, long-term care, inflation and possibility of living far beyond the average life expectancy.

Today’s subject heading is the title of a new book by Dr. Moshe Milevsky, a finance professor at York University’s Schulich School of Business.

Saturday’s column reviewed the book while the first of three video interviews with Dr. Milevsky went up on the weekend. Part 2 runs Tuesday and Part 3 on Thursday.

A big theme of the book, reprised in the first interview, is that of Human Capital, or one's future earnings potential. For young people just starting out, their Human Capital is huge (think hockey star Sydney Crosby) and life is a matter of gradually converting that human capital into financial capital. In that respect, the ScotiaBank marketing theme "you're richer than you think" is actually quite accurate.

Older people have spent half a lifetime or more using up their human capital and (hopefully) converting it into a nest egg they can live on once they no longer are able to, or wish to, work.

This is an interesting way of looking at personal finances. For one, it makes clear how life insurance fits into the big picture. Life insurance is for young families and protects that family in case a young breadwinner (or breadwinners) is through some misfortune unable to convert that human capital into financial capital.

This Human Capital can be analagous to financial capital, which leads to Milevsky's intriguing title. Your human capital is "bond-like" in nature if you're a salaried employee with a Defined Benefit pension plan — the situation Milevsky himself is in as a tenured professor. On the other hand, the human capital of an entrepreneur or investment banker is more like a stock.

Again, the implications for personal finances are clear. If you're a "bond" you might want to balance your human capital by adding more stocks to your growing financial capital. If on the other hand you're a "stock," you might consider adding more bonds to your financial capital to offset the risk you take in your day to day work.  

Many of us are not 100% a stock or 100% a bond; we are a blend, analogous perhaps to a balanced mutual fund or a pension fund, most of which classically have an asset mix of 50 or 60% stocks to 50 or 40% bonds. The implications are clear for people working in certain industries: if you're in the oil and gas business, you shouldn't concentrate your financial assets in the same sector. This is a lesson the people at Enron learned when their pension plans invested mostly in Enron stock cratered along with the company itself.

Product Allocation is the New Asset Allocation 

One of the most intriquing — and challenging — chapters in the book is the tenth one, entitled Product Allocation is the New Asset Allocation. Here, Milevesky presents a set of grids that attempt to match the various risk management attributes of investors with often-conflicting goals. These are mapped to three predominant forms of retirement products, which bear the initials LPIA, SWIP and GLIB. Those stand for Lifetime Payout/Income Annuities, Systematic Withdrawal Plans and Guaranteed Living Income or Withdrawal Benefits (for life). These can be thought of as annuities;  traditional investment portfolios of stocks, bonds or investment funds owning the same; and finally a new generation of "finsurance" products like Manulife Income Plus.

Each of these three major retirement product categories is good or not-so-good at coping with the three main risks facing retirees: inflation risk, sequence-of-return risk and longevity risk. And each product category is strong or not-so-strong at providing retirees with liquidity, estate planning or  the behavioural aspects of investing.

A chart on page 168 of the book depicts two three-by-three grids that summarize the relative strengths and weaknesses of these main retirement product categories; tallies their associated fees and expenses; and finally arrives at a Retirement Product Grade Point Average (GPA). Interestingly, all three product categories get the same net score. What's important for retirees and their advisors is devising the right mix for their particular circumstances and objectives.

As I note in Saturday's review, this part of the book is not easy reading but it certainly provides a fresh new paradigm by which investors and financial advisors view retirement products. It helps to dispel the evident confusion many investors (and even advisors) have about how annuities and variable annuities like Income Plus (or SunWise Elite) fit in with traditional financial investments.  

Clearly, the mix of these three types of products will vary by client. Someone with a generous Defined Benefit pension (Milevsky provides a typical case study on page 175) can allocate more of his retirement products to traditional investments; those with no such DB plans may need more of the variable annuity products. Note too that while Milevsky earlier in his career was a well-quoted source who questioned the costs and value of variable annuities, in the book he admits to having become more positive on them.  In 2006, he was co-awarded a U.S. patent for inventing techniques designed to optimize asset allocation during retirement through the use of life annuities.

Part 2 of the video interview looks at another classic Milevsky theme, the Retirement Risk Zone; and Part 3 looks at longevity, longevity insurance and annuities.
 

–60–  

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