Nevada Retirement Planners

Beyond Work is the title of a recently published book by executive coach and business psychologist Bill Roiter [pictured to the left].  It’s another book about the retirement of the baby boom generation – I reckon they arrive through my transom at the rate of one a month. Nothing wrong with that: some I skim, some I read.

This one I skimmed. The subtitle is “How accomplished people retire successfully.” In that respect, it covers roughly similar ground as Sherry Cooper’s The New Retirement, which we reviewed here earlier this year.

While based in Boston, Roiter is writing for a North American audience. When he writes about Social Security, he also mentions the Canada Pension Plan; or when he talks about IRAs he mentions the RRSP in the same breath.

He begins with a survey about how accomplished people retire – not surprisingly, having been accomplished in their working years, accomplished retirees also ace retirement. They never really stop working, they just shift gears. Roiter uses a composite derived from multiple interviews of real retirees to paint a picture of the typical accomplished retiree as well as those that don’t do a good job of retiring. The latter typically were totally focused on work, never developed outside interests, then feel bereft when their old colleagues still in harness don’t wish to hear from them too often. 

In my interview with Moses Znaimer earlier this week, he mentioned some statistics worth citing here; only 7% of retirees engage in a classic full-stop retirement; 50% keep working because they need the money and 40% work part-time as a way to stay connected and to supplement their retirement income.

Roiter includes an interesting chart on page 23 which provides generational profiles of the baby boomers’ parents (65 to 85 as of 2007); the Baby Boomers today (43 to 61 as of 2007); and Baby Boomers in 2030 (when they will be 66 to 84, or the age our parents are today if they’re still living).

The chart contrasts the 2030 boomers with our parents. The future boomers will be more active, more dedicated to continuous learning, focused more on self-improvement than family and will spend more on out-of-pocket health care costs.

Roiter also summarizes the work of authors like Gail Sheehy (Passages) and Daniel Levinson (Seasons of a Man’s Life), then synthesizes their insights into his own “Beyond Work” categorization of the three eras of adulthood.  They are:

1.)    First Era: Definition and Growth (20 to 40 years)

2.)    Second Era: Consolidation and Fulfillment (40 to 60 years)

3.)    Third Era: Knowledge and Reward (60+ years).

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Today's subject title is from this essay published in The Nation. The writer, Nicholas von Hoffman,  bills himself as a "Pulitzer Prize losing author" of 13 books. [Note the word "losing"!]

Hoffman's gloomy essay makes some telling points. He notes that everyone is suffering from the current economic malaise, even those who didn't speculate on their homes or buy a home they couldn't afford. But because of the excesses of their neighbours that did  and "the criminal folly of American finance" their retirement dreams nevertheless are being destroyed. 

One of the big arguments the financial industry has made in encouraging people to invest for retirement is that America's Social Security system may not be there for them when it's the boomers' turn to retire. The situation was nicely summarized by Scott Burns and Lawrence Kotlikoff in the 2004 book, The Coming Generational Storm. The fact that the Canada Pension Plan is on a somewhat sounder footing is another topic, since Burns and Kotlikoff, as well as Hoffman, are far more concerned about the situation in the States.

The irony, as Hoffman notes, is that the way things have been unfolding lately, "the bright spot is Social Security." Unfortunately it's "private savings that may not be there. They are discovering they have been forced into a system in which other people have, in effect, been allowed to gamble with their retirement savings and have lost it."

Hoffman says Social Security cheques will be there whether stocks are up or down and the benefits are indexed to inflation to boot. However, it is "too narrow a ledge to stand on through the years between retirement and death." It was only meant to be a base to complement  employer pensions and private savings.  But instead, America's tax-sheltered savings  have been vaporizing along with the value of their homes. Meanwhile the "Wall Street fee farmers" get rich no matter what happens to their clients' retirement plans.

In short, not a fun read. One hopes essays like this turn out to be the kind of gloomy consensus that characterizes market bottoms. As we noted in this piece last week, the fund manager of the late Sir John Templeton's Templeton Growth Fund felt the news couldn't get worse and therefore investors should invoke Templeton's famous maxim that the best time to buy stocks is at the point of maximum pessimism. Note too that part 2 of the video interview with Lisa Myers is now up and available here. The focus of the second segment is on why there are no Canadian stocks in the Templeton Growth Fund currently.

If indeed the news does get worse, then all bets are off. If that's the case, for many the only solution will be to delay retirement and keep working as long as possible.  

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The province of Quebec continues to be on the forefront of Phased Retirement — a way of allowing aging employees to draw partial benefits from employer-sponsored pension plans while still accruing pension benefits for their later full Retirement. The idea is to gradually cut down your hours — to perhaps a four-day week, then three-days — rather than abruptly go from a five-day a week regime to a "full-stop" zero days a week classical retirement.

According to Watson Wyatt Canada — which just issued the following flash advisory — Quebec's Bill 68 received assent on June 20th and it "contains some surprises."  Bill 68 is an act that amends the Supplemental Pension Plans Act and the Quebec Pension Plan (Quebec's equivalent of the Canada Pension Plan). Most of the changes will be more of interest to pension industry practitioners than the members of pension plans, although there may be implications for near-retirees. They concern multi-employer plans, letters of credit and other fine points, not all of them directly applicable to Phased Retirement per se.

The biggest amendment I could see is that payment of a Phased Retirement pension to members of Defined Contribution plans is now stated to begin as early as age 55. The maximum annual benefit payable to a DC plan member cannot exceed 60% of the ceiling on the life income the member could receive under a life income fund.

In mid December of 2007, the federal government gave Royal Assent to legislation implementing changes to the Phased Retirement rules that were announced in the 2007 federal budget and economic statement. This legislation was a major step towards introducing Phased Retirement across Canada, although provincial action is still required to allow non federally-regulated employers to take advantage of it.

A survey of senior business leaders conducted by Watson Wyatt and the Conference Board of Canada found more than half of chief financial officers and Human Resource department vice presidents were "very concerned" about attracting and retaining highly skilled high performing employees that are approaching Retirement. A third of the respondents indicated they had implemented or planned to implement Phased Retirement.

Currently, the only provinces that permit phased retirement are Alberta and Quebec. Manitoba has introduced some legislative amendments that have yet to be brought into force. For federally regulated employees, the federal government has taken steps to eliminate obstacles in pension standards to the Phased Retirement provisions of the Income Tax Act.

For more see this backgrounder, entitled A Closer Look at Phased Retirement.  

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Mary Diwell. Photo by Jana Chytilova for National Post

Saturday's column in FP Weekend looked at the case of Mary Diwell, a retired investor who refused to accept a deal with a large financial institution in return for her silence. The document she says she refused to sign is colloquially known as a gag order. Here's an excerpt of the actual gag order she declined to sign. Had she actually signed it, she would not have been able to supply it to us to publish here:

Full and Final Release and Confidentiality Agreement

IN CONSIDERATION of the payment of TWENTY THOUSAND DOLLARS ($20,000.000) and other good and valuable consideration, the receipt and sufficency of which is hereby acknowledged, MARY DIWELL (the Releasor) hereby releases and forever discharges SCOTIA CAPITAL INC. (formerly ScotiaMcLeod Inc.) and FRANK L. CESTNIK and their respective present and former affiliates, subsidiaries, predecessors, successors, assigns, servants, agents, officers, employees, directors, lawyers, insurers, heirs, executors, administrators and beneficiaries as the case may be (The Releasees) from any and all actions, causes of action, claims and demands for damages, loss or injury, howsoever arising, which the Releasor ever had, now has or may hereafter have against the Releasees …

IT IS UNDERSTOOD AND AGREED that the said payment is deemed to be no admission whatsoever of liability on the part of the said Releasee.

THE RELEASOR UNDERAKES AND AGREES that the terms of this settlement shall be kept confidential and shall not be disclosed to any third party … without the express written permission of SCOTIA CAPITAL INC.

This week the third  and fourth of four video interviews with retirement expert Malcolm Hamilton were published here.  The first two aired earlier this summer. Hamilton is an actuary and worldwide partner with Mercer's.

Segment three looks at the Tax Free Savings Account (TFSA) that was announced in the last federal budget. Most of Canada’s financial services industry is working feverishly to get TFSAs ready for the new year. By all accounts, the TFSA could be the biggest boon to the industry since the RRSP.

In March, Hamilton published a long essay on TFSAs, which can be found at the end of the blog post here. In the very long term he is concerned about a future generation of seniors that will live virtually tax free in retirement.

That’s a far cry from the current situation. As he mentions in the interview, today’s seniors frequently cry the blues when they start withdrawing from their Registered Retirement Income Funds (RRIFs). They tend to forget that they got a tax break when they first put money into their RRSPs (which later can be converted to RRIFs, at which point withdrawals are taxed. See yesterday’s entry on CD Howe’s proposal to ease up on the RRIF withdrawal requirements).

In the shorter term, Hamilton describes the TFSA as a “wonderful thing.” He contrasts this to non-registered or taxable investment accounts, which he has in the past termed “the leaky bucket.” He points out that receiving 3% interest in a taxable GIC, then paying 40% tax on it to net 1.8% is essentially “futile” if inflation is running at 2%. “You’re not improving your wealth at all outside a tax shelter. Investing in a tax shelter you at least have a fighting chance.”

Hamilton doubts that ordinary Canadians have enough disposable income to pay off all debts and maximize contributions to the three major tax shelters now available: the RRSP, the TFSA and (for college-bound children), the Registered Education Savings Plan.

Most will have to prioritize. “They have a problem finding savings to start with.”

By contrast, affluent people like executives and surgeons will max out on all three (or the equivalent in Registered Pension Plans) and still have enough additional cash to invest in non-registered accounts. That group still has less tax-sheltered room to build up retirement savings than their equivalents in the United States or the United Kingdom. Even so, with the TFSA and higher RRSP limits, this group is better off than it was ten years ago, Hamilton says.

While superficially similar to Roth IRAs in the United States, Canada’s TFSA is much more flexible and has higher savings limits. The Roth is expressly for retirement saving while the TFSA can be used for different purposes at different stages of life.

Thus, young Canadians for whom retirement savings is not a priority can use the TFSA to accumulate a down payment for their first homes.
 
Hamilton describes how the TFSA may be a useful savings vehicle for low-income Canadians  who used to be discouraged from saving in RRSPs because of the clawback of Old Age Security benefits.  Even so, they still may not have to save anything if they wish to retire at 65 and enjoy the same modest lifestyle they experienced in their working years. Before the TFSA, they might have got 25% in taxes back by contributing to RRSPs but ended up losing 75% to the clawback in old age, a situation he describes as “tragic.”

Hamilton also notes that the TFSA may be useful for seniors who do have large RRIFs. While they still will have to pay taxes on RRIF withdrawals, they will be able to pump the post-tax amounts so withdrawn back into a TFSA ($5,000 per person per year). Once inside the TFSA, future investment income earned by the investments housed there will be free of tax, even when the money is withdrawn from the TFSA.

The fourth interview, on pensions, went up on Thursday. The segment discusses the decline of private sector Defined Benefit pensions and what to do about it; how the Canada Pension Plan might be expanded; Phased Retirement and how America's Social Security System went down a different path than Canada's retirement income system.

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There’s a glut
of books on how baby boomers can retire but I did a double take the other day
when one author claimed that most of us can retire “in as little as a weekend.”

Retirement guru
Bill Losey has written a book called Retire In A Weekend! The Baby Boomer’s
Guide to Making Work Optional and is throwing in a DVD about the ten biggest mistakes people make when retiring.

As noted in
this blog earlier this week, for American boomers the magic age is 62, which is
the earliest they can collect Social Security benefits. Canadians have a
two-year jump on them since we can collect early but reduced Canada Pension
Plan benefits as early as age 60.

But of course
there are ten times as many American boomers and one of them turns 62 every 7.5
seconds, or 10,000 a day. By 2015, boomers age 50 and older will represent 45%
of the American population. Little wonder visionary Canadian broadcaster Moses
Znaimer took over the Canadian Association for the Fifty Plus (CARP) and is
remaking its magazine as Zoomer come the fall.

If Znaimer has his
way, Canadian boomers will soon be spending our days like him, relaxing in a
hot bubble bath listening to classical music from his recently acquired FM
radio station, The New Classical 96.3 FM.

 However, many
American boomers may not enjoy such a relaxed retirement while they're still young enough to enjoy it. A recent study by the Center for
Retirement Research at Boston College found that at current levels of
retirement savings, six in ten older American workers are at risk of being
unable to maintain their standard of living in retirement. For them, the solution will be to delay retirement, as explored in this blog earlier this week.

 Enter certified financial planner
Bill Losey, the creator of National Retirement Planning Month.  He is also president of Losey Retirement
Solutions LLC, an independent registered investment advisory firm.

 Here are the ten mistakes, with explanatory notes by me in square brackets:

1. Listening to the wrong people [aka bad or skewed advice]
   
2. Not understanding the tax consequences for investments, IRAs [RRSPs in Canada],
   pensions etc…
3. Choosing the wrong pension option [hang on to those Defined Benefit plans if your firm still offers them!]
   
4. Misunderstanding what medicare and social security does and doesn’t
   pay for
5. Getting caught by the 20% withholding penalty for lump sum
   distributions [specific to Americans only]
   
6. Owning your assets the wrong way [tax-efficient asset location: put bonds in tax shelters; equities outside]
   
7. Thinking “risk” just involves losing principal [even cash and bonds subjects us to inflation risk and governments always inflate]
   
8. Paying for the wrong kinds and wrong amounts of insurance [rent it with term insurance; don't mix investments with insurance]
   
9. Planning for your retirement when you are already retired [say what?]
   
10. Not doing consistent, careful, ongoing planning [i.e. hire a professional like Losey]
    

 
And how to avoid them? For starters, go here or for a few chuckles, see Losey's 3-minute Baby Boomer Retirement Movie.

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This morning the third of four video interviews with retirement expert Malcolm Hamilton was published here.  The first two aired earlier this summer. Hamilton is an actuary and worldwide partner with Mercer's.

This particular segment looks at the Tax Free Savings Account (TFSA) that was announced in the last federal budget. Most of Canada’s financial services industry is working feverishly to get TFSAs ready for the new year. By all accounts, the TFSA could be the biggest boon to the industry since the RRSP.

In March, Hamilton published a long essay on TFSAs, which can be found at the end of the blog post here. In the very long term he is concerned about a future generation of seniors that will live virtually tax free in retirement.

That’s a far cry from the current situation. As he mentions in the interview, today’s seniors frequently cry the blues when they start withdrawing from their Registered Retirement Income Funds (RRIFs). They tend to forget that they got a tax break when they first put money into their RRSPs (which later can be converted to RRIFs, at which point withdrawals are taxed. See yesterday’s entry on CD Howe’s proposal to ease up on the RRIF withdrawal requirements).

In the shorter term, Hamilton describes the TFSA as a “wonderful thing.” He contrasts this to non-registered or taxable investment accounts, which he has in the past termed “the leaky bucket.” He points out that receiving 3% interest in a taxable GIC, then paying 40% tax on it to net 1.8% is essentially “futile” if inflation is running at 2%. “You’re not improving your wealth at all outside a tax shelter. Investing in a tax shelter you at least have a fighting chance.”

Hamilton doubts that ordinary Canadians have enough disposable income to pay off all debts and maximize contributions to the three major tax shelters now available: the RRSP, the TFSA and (for college-bound children), the Registered Education Savings Plan.

Most will have to prioritize. “They have a problem finding savings to start with.”

By contrast, affluent people like executives and surgeons will max out on all three (or the equivalent in Registered Pension Plans) and still have enough additional cash to invest in non-registered accounts. That group still has less tax-sheltered room to build up retirement savings than their equivalents in the United States or the United Kingdom. Even so, with the TFSA and higher RRSP limits, this group is better off than it was ten years ago, Hamilton says.

While superficially similar to Roth IRAs in the United States, Canada’s TFSA is much more flexible and has higher savings limits. The Roth is expressly for retirement saving while the TFSA can be used for different purposes at different stages of life.

Thus, young Canadians for whom retirement savings is not a priority can use the TFSA to accumulate a down payment for their first homes.
 
Hamilton describes how the TFSA may be a useful savings vehicle for low-income Canadians  who used to be discouraged from saving in RRSPs because of the clawback of Old Age Security benefits.  Even so, they still may not have to save anything if they wish to retire at 65 and enjoy the same modest lifestyle they experienced in their working years. Before the TFSA, they might have got 25% in taxes back by contributing to RRSPs but ended up losing 75% to the clawback in old age, a situation he describes as “tragic.”

Hamilton also notes that the TFSA may be useful for seniors who do have large RRIFs. While they still will have to pay taxes on RRIF withdrawals, they will be able to pump the post-tax amounts so withdrawn back into a TFSA ($5,000 per person per year). Once inside the TFSA, future investment income earned by the investments housed there will be free of tax, even when the money is withdrawn from the TFSA.

–60– 

As this piece on
page A9 of the National Post reports, there are now 1.1 million Canadian
families worth $1 million or more. According to 2005 data contained in a new
survey from Statistics Canada, that’s a jump of 461,000 from six years before.

And yes, a big
reason for that jump is an increasing number of baby boomers who are in their
peak earning years and getting serious about stashing away money for their
looming retirement. Those in their 40s more than doubled their wealth from
$210,800 in 1999 to $456,800 by 2005, while boomers in their 50s almost tripled
their wealth. Included in the calculations are stocks, bonds, vacation
properties, real estate, RRSPs, bank accounts and business equity.

But of course, as University of Toronto
macroeconomics professor Jack Carr notes, “being a millionaire isn’t what it
used to be.” That perennial scourge called inflation continues to erode our
purchasing power. To the extent prices have doubled or tripled, you might argue
you need $2 or even $3 million in order to have the economic clout of
yesterday’s millionaires.

These days, the
financial industry tends to view mere millionaires as part of the “mass
affluent” crowd, although some still get labelled “high net worth.” But they
reserve the term “Ultra High Net Worth” to describe the really well-heeled, a
figure typically north of $10 million. Alternatively, they use the term
“penta-millionaire” to describe those with $5 million, or “deca-millionaire” for
those with $10 million.

So those who are
mere “Uni-millionaires” [a term I’ve just invented) may not want to shut it
from the rooftops, even if they don’t mind endless calls from telemarketers and
fund-raisers from good and not-so-good causes. As one source noted, in the
United States, those with $1 million in financial assets are no longer in the
top 1% or 2% of America’s economic class.

According to
demographer David Foot, also of the University of Toronto, the growth rate of
Canadian millionaires will start to taper off over the next six to nine years,
as the front end of the boomers start selling their investments during
retirement.

–60–

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.
 

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