Here are my posts for the past two weeks:
A Financial Product I’d Like to See
Safe Stocks
Reader Question: Changing Asset Allocation
Here are some short takes and some weekend reading:
Potato explains in detail the problems with Air Miles and how they’ve effectively expired already. This post captures the problems generally with almost all forms of loyalty points and miles.
Barry Ritholtz cracked me up with his take on McKinsey’s predictions for global investment returns.
Canadian Couch Potato answers a tricky reader question about when and how to switch from an index portfolio of TD e-Series funds to an ETF-based portfolio.
The Fraser Institute issued a report explaining how the rates of return people get on their CPP contributions is lower the younger you are because contribution rates have risen over the years. The media release I received said “Canadians born after 1971 will receive meager 2.1 per cent rate of return.” However, this is misleading. That is a real rate of return, meaning a return after subtracting out inflation. The actual report is much clearer on this point. A 2.1% return sounds dismal, but 2.1% above inflation is actually more than most people will get from their other investments.
Preet Banerjee interviews Andrew Graham, CEO of Borrowell, in his latest podcast.
Boomer and Echo offer 11 different model portfolios, some using ETFs and others using index mutual funds from various Canadian providers.
Big Cajun Man takes a look at the enormous changes that will come with self-driving cars.
Million Dollar Journey offers some income-splitting ideas for couples. I use many of these techniques myself.
My Own Advisor interviews an index investor who is approaching retirement age.
re: CPP -- the CPPIB does a really good job, imo, with our money. It's a bit of a stand-out from the rest of the government entities. The only issue I have with them is that their expenses to operate the fund are massive, even when compared to high-fee funds. If they ever decide to run the fund more efficiently (it is government, so don't bet on it), that 2% return would increase.
ReplyDelete@SST: Actually, they are projecting a 4% real return on investments. But this doesn't translate into a 4% real return for us. CPP is a defined-benefit plan. So, based on the current rules, the 2.1% return for those born after 1971 is locked in. One could argue that better or worse returns may lead to a change of rules, but that's another matter.
DeleteMichael, I think the 2.1% real return applies only when considering the employee contribution. When the employee and employer contributions are considered, the real return drops close to 0 (I get 0.3%). I think this is relevant if you believe payroll taxes are ultimately paid by employees in the form of lower compensation.
DeleteThe best way to improve your average return from CPP is to live longer than average. So get out there and get healthy. :)
DeleteOr better yet, defer CPP payments to age 70 and then live to 100!
Delete@Blitzer68: The paper seems to be using the full 9.9% contribution to CPP for the calculations. They assume your first 8 years are dropout years. If you pay the maximum the whole way, they say the rate of return drops to 1.7% from 2.1%. I haven't attempted to check any of their figures myself.
DeleteWith 40 annual 9.9% contributions you need to make around 35 annual 25% withdrawals to get an IRR of 2.1%. Can you check my math? It takes two minutes in a spreadsheet.
Delete@Blitzer68: It should be only 39 years of contributions because there are 8 years of dropouts (17% of (65-18)). There is also the YBE which is currently at $3500. The YBE hasn't exactly scaled with inflation, but if we treat this year's figures as typical, we only contribute the fraction 1-3500/54900 = 93.6%. This scales the 9.9% down to 9.269%. The spreadsheet I put together shows the money lasting for just under 30 years at a 2.1% real return.
DeleteThis seems long, so I can only assume that other factors were taken into account. Perhaps dropouts for child rearing or the real contribution amounts in past years?
I repeated the calculation based on only the employee contribution and got 12.7 years, which seems too short.
Thanks Michael, I appreciate your time on this. A 65 year old has a life expectancy of 20 years (average of male & female) according to stats Canada life tables. Assuming no other factors like child rearing drop outs, I get a real return of 1.09% (employer contribution included) or 3.34% (just employee contribution). It's like they couldn't make up their minds so they took the average. They took a muddled approach if this is the case.
Delete@Blitzer68: Maybe a more careful read of the report would reveal the discrepancy.
DeleteI gathered more info from the person who provided the details for this report. He is factoring in a 1% real wage growth and an extra 3.5 years of life expectancy (23.5 versus 20). This seems to do the trick and brings the real return to 2.1%. Note though that without these two factors, real return drops to about 1% according to my calculations.
Delete@Blitzer68: Thanks for chasing that down. Now that we have the details straight, I'm tempted to back up again and observe that many Canadians will not achieve an average compound real return of 1% on their portfolios over their lifetimes. The main culprits are costs, poor market timing, and low fixed income returns. CPP returns may not serve savvy cost-conscious investors well, but they are good for most Canadians.
DeleteI'm a fan of CPP, even at a 1% real return - it's a good base to count on along with OAS. The future Ontario Retirement Pension Plan (ORPP) should be an even better deal since it's supposed to be self-funded from the start.
DeleteWhether these self-driving cars get adopted or not is another point of contention, but I would have no problem using one (once they are proven), especially over long distances. Thanks for the inclusion this week, and enjoy the lovely weekend ahead.
ReplyDelete@Alan: I saw a 60 Minutes piece on self-driving cars. The interviewer said he was nervous at the start, but that after 10 minutes he was fine with the self-driving. As with other revolutionary technologies, people will adapt rapidly.
Deletehttp://www.cbc.ca/news/technology/sex-distracted-driving-1.3562029
DeleteSelling point? ;)
@SST: Sure sounds like a selling point to me. There will surely be some challenges on the path the self-driving cars, but it will all be worth it to get to full autonomy.
DeleteMany people doubt that we will get to full autonomy, but they're mistaken. We want to believe that our judgement will always be better than that of a machine, but once cars have been fully autonomous for several years, few people will think this way any more (about driving).
Michael -- totally a non-judgemental question: do you think your education and vocation gives you a certain bias regarding hi-tech (advancement, superiority, etc.)?
Delete@SST: My education and vocation have given me the skills to have some understanding of the challenges of creating self-driving cars. For people without technical skills, I'm not sure how they form an opinion on this subject other than simply declaring what they want to be true.
DeleteI see this issue as similar to standard vs. automatic transmissions. When I was a young adult, almost all people with an opinion on the subject believed that human-operated standard transmissions gave better acceleration and fuel usage than automatic transmissions, and that this would always be true. I don't think it's controversial to say that automatic transmissions tuned for either acceleration or fuel economy are the winners today. Autonomous cars represent a much more difficult challenge, but today's technology is more than powerful enough -- we just need the software now.
Thanks for the mention. MDJ's article was good. The TFSA should be one everyone should take advantage of. I can't use some of the other strategies at this time for a few reasons.
ReplyDeletePension splitting will occur in another 25 years, long ways out for that one!
Have a good weekend,
Mark