To me, the most interesting observation Frederick Vettese makes in his book The Essential Retirement Guide is what to do with the bond allocation of your portfolio at retirement. “It makes sense to liquidate these fixed income investments and buy an annuity.” This seems so logical, but it had never occurred to me before. The main advantage of an annuity is that it eliminates longevity risk. When the insurance company sets your annuity payments, it can do so based on average lifespans. However, if you invest your money yourself, you have to account for the possibility that you’ll live to be very old. The main disadvantage of an annuity is that its returns are based on long-term bond returns; you can’t get the higher expected returns and inflation protection that stocks provide. Vettese isn’t the first person to suggest putting part of your nest egg into an annuity. However, what is new to me is the direct comparison to a bond portfolio. To maximize your spending from the fix...

The idea that we’ll naturally want to spend less as we age is very seductive. It means we need less money to retire, can retire younger, and can spend a higher percentage of our savings in the early years of retirement. The latest writer to support this idea is actuary Frederick Vettese in his book The Essential Retirement Guide . This article is not a review of the entire book, but an examination of the chapter “How Spending Decreases with Age.” All the data confirms that we do spend less as we age. The question at hand is why we spend less. If older retirees spend less because they run out of money, then it doesn’t make sense to bake reduced spending into our retirement plans. However, Vettese concludes that the dominant reason we spend less as we age is a “loss of interest in spending or physical ability to spend.” He uses this to justify “assuming that the retirement income from retirement savings ... does not have to be indexed to inflation.” This conclusion flies in th...

Here are my posts for the past two weeks: CPP Forgiveness or Unfairness Market Timing Using a Spreadsheet Are You a Stock or a Bond? Here are some short takes and some weekend reading: There is an important downside to our trend toward a cashless society . Contrary to popular belief, this writer says money can buy you happiness if you do it right . I agree that if you spread money out over your entire lifetime, it can make you happier. Sadly, many people seem to blow through large windfalls quickly. Preet Banerjee interviews Ron Tite to discuss how brands compete for your time. Tite is very funny, so you’ll be entertained while you learn about content marketing. Boomer and Echo bring us an investing guide for beginners. It can be tricky to put together generic advice that is relevant to a wide range of investors, but this is a good article for beginners. Frugal Trader updates his journey to financial independence. He includes a detailed accounting of the divid...

Finance professor Moshe Milevsky has an important central message in his book Are You a Stock or a Bond? : your ability to earn money is an important asset that you must take into account when you decide how to invest your savings and plan for retirement. He calls this ability to earn money your human capital. The message that we should take into account our human capital is an important one, but I’m less impressed with some of the detailed messages in this book. The basic idea of human capital is for you to look at the risk factors for your income and take them into account in constructing your portfolio. So, an investment banker whose income is “contingent on the vagaries of the stock market” might choose to invest a sizable portion of his savings in fixed income. On the other hand a tenured professor might choose a riskier portfolio. In Milevsky’s tenured professor example, she has $250,000 and he calculates that she should borrow another $450,000 to invest a total of $700,0...

I’m no market timer, but my investing spreadsheet looks like one. I’ve coded just about all of my investment decisions into one spreadsheet. Whenever I add new savings, the spreadsheet tells me what to buy to bring my portfolio back to its target asset allocation percentages. However, if we look at the rebalancing decisions in isolation, they look like brilliant market timing. It’s no secret that the Canadian dollar has been extremely volatile compared to the U.S. dollar over the past year. I had no idea this would happen. I didn’t make any predictions. I don’t know what will happen in the future. But my rebalancing spreadsheet looks like it made good predictions. Before the Canadian dollar began dropping, I was adding new money to U.S. stocks to get my portfolio back to its target percentages. After the Canadian dollar dropped, I was buying Canadian stocks. The recent run-up in the Canadian dollar has me back to buying U.S. stocks. I’ve consistently bought low. How can ...

A friend I’ll call Bill recently began receiving Canada Pension Plan benefits. He was telling me that the return he’s getting on his premiums doesn’t seem all that good. He paid the maximum for almost all of his 43 years of working and the payout is less than he expected. The reasons have to do with inflation and some of CPP’s forgiveness rules. Bill’s benefits will increase with inflation for the rest of his life. This has to be factored into any computation of his return, but that’s not the only reason his return seems low. If Bill hadn’t worked for 7 years he wouldn’t have made any CPP contributions during that time, but he would still be getting the same CPP benefits today. This is because when we calculate CPP benefits we get to drop out the 17% of months where we earned the least. If Bill had been the primary caregiver of his children when they were under 7 years old, he could have dropped out another 7 years as well. On the surface, this seems very generous. You get...

Here are my posts for the past two weeks: Examining Six Reasons to Downgrade Retirement Saving The Economics of Fixing a Furnace Here are some short takes and some weekend reading: Canada has sold of most of its gold reserves in favour of financial assets . This makes a lot of sense to me. Gold has little inherent value compared to its current price. I’d rather put my bet on owning a small slice of all businesses. Tom Bradley at Steadyhand cautions that the Vancouver and Toronto real estate markets are not normal. Big Cajun Man has a funny way of illustrating hidden ways you may be wasting money. Boomer and Echo ask whether zero down mortgages are a last gasp from a housing bubble ready to pop. Preet Banerjee starts up his podcast again with an interview with WealthSimple CEO Michael Katchen. The Blunt Bean Counter explains what’s going on with CRA “compliance letters” that will be sent to about 30,000 people this year. My Own Advisor interviews Andrew Hall...

I don’t bother to insure against costs I can handle, such as fixing a furnace. However, a recent experience has me re-examining the motives of furnace service companies. For the first time in about 6 years my furnace stopped working. The house was getting cold fast and I wasn’t inclined to be cost-sensitive. I was prepared to pay double to get it fixed Sunday evening instead of waiting until Monday morning. It’s no fun to get hit with costs at unpredictable times, but at least I had saved plenty of money over the years by not buying a service contract. Back when I decided not to pay for a furnace service contract, I had reasons. The main reason was that insurance is expected to cost more than just paying as you go. The second was that I figured furnace repair companies would be more responsive to a paying customer who created profits instead of service contract customers who just create costs when they have furnace problems. My wife picked a furnace repair company and calle...

Rob Carrick upset many personal finance experts when he said there are six reasons to downgrade retirement savings as a financial priority. There is a thread of truth in each one, but I fear that readers who are overspending will latch onto one or more of them to justify continuing down their high-spending paths. Before getting into Carrick’s list, I’d like to discuss the phrase “retirement saving.” It’s hard for young people to think about retirement. It’s too far off. I’ve found it more effective to explain the importance of building net worth. Having more money gives you choices in life. Ultimately, having a substantial net worth will give you a pleasant retirement, but even during your working life, having more money smooths out life’s tough breaks. I’ve found that focusing on net worth resonates better with young people than talking about retirement saving. But there is another advantage as well. Too many people think they’re saving for their retirement when they simul...