I enjoy reading the Globe & Mail’s Financial Facelift every weekend, if only just to goof on the idea that a couple earning $200,000+ per year with $3 million in the bank can be worried about their financial future. The tipping point of absurdity came when the Globe profiled Eric and Ilsa, the Vancouver couple struggling to get by on $25,000 per month.
This week’s feature was no different than usual. The couple had more than $2.5 million in assets, no debt, and income of $187,000 per year. A typical financial facelift profile (you’ll be fine, Tina). What caught my eye this time was the advice from the financial planner asked to weigh in on the couple’s situation.
The planner questioned the couple’s asset mix, which included a large amount of cash (30 percent of their portfolio) that is “creating a substantial drag on portfolio returns.” The planner goes on to say that, despite their modest investment returns, the couple will have an estate of $3.3-million at Tina’s age 90.
Then came this bizarre recommendation:
“For the fixed-income side of the portfolio, he suggests supplementing traditional fixed-income securities with some alternative income investments such as private debt, international real estate and accounts receivable factoring.”
He said by improving their investment returns the couple could retire “tomorrow” instead of in four years, as originally planned. That may be true, but a recommendation to put 20 percent of their portfolio into these alternative strategies is completely unnecessary and risky.
What purpose does it serve to complicate their investment approach? They could’ve stuck to their simple, risk-averse plan and been just fine.
But what happens all too often? The planner talks over their heads with some smart sounding strategy – that of course they couldn’t possibly attempt on their own – and suddenly the couple is paying 1 to 1.5 percent of their assets every year for ‘professional guidance’ that probably wasn’t needed in the first place.
In my experience, when a couple has more than enough money to last a lifetime, it’s better to dial back the risk and accept a lower rate of return. Not complicate matters by taking on riskier assets that the couple likely doesn’t understand.
To me this is a case of the planner trying to get too cute with this financial facelift instead of telling the couple what was painfully obvious to everyone else – they’ll be fine.
This Week’s Recap:
This week I shared the math on how much my defined benefit pension plan will pay in retirement.
My Smart Money column in the Toronto Star looked at five lessons learned about booking Aeroplan flight rewards.
Many thanks to Ruth Saldanha at Morningstar for including my comments in this piece on investing in an RESP.
Promo of the Week:
A reminder to get your free ticket to watch me and 25+ Canadian personal finance and investing experts speak at the Canadian Financial Summit. Watch this all-star panel online from the comfort of your couch from September 12-15.
Guaranteed to be something for everyone with topics on financial independence / retire early (FIRE), investing, credit card churning for travel points, how to cut through financial jargon, busting financial myths, and much more. Don’t miss it!
Weekend Reading:
Call it the chart of shame. It’s the S&P 500 versus everyone who said the market was about the crash.
Is it okay to retire with debt? CFP Jason Heath looks at the options in this MoneySense article.
Rob Carrick says the long, dark night for GIC investors and savers has finally come to an end.
New research presents alternative methods, like robo-advisors, to manage retirement income.
PWL Capital’s Ben Felix looks at factor investing in his latest Common Sense Investing video:
Can you imagine a world in which mutual-fund managers pay investors an annual fee – rather than the other way around? That may not be as far-fetched as it sounds.
Nick Maggiulli, Of Dollars and Data, explains what will always be true for investors: You cannot have more reward without taking on more risk.
A 90-year-old ‘grandma scam’ victim took out $10,000 from TD Bank to pay a fraudster — in cash.
Dan Bortolotti looks at ETFs or index mutual funds – which one is best for an RESP? For what it’s worth, I use TD e-Series funds for our kids’ RESPs.
Younger investors, here’s how to get fee breaks and other little-known perks at online brokers and robo-advisers.
Michael James says that seniors staying in homes they can no longer maintain or get around safely in is a problem.
An American visual, but interesting nonetheless. The cost of 30 common American grocery items over 10 years.
Finally, meet Paul Singer, doomsday investor and head of Elliott Management who has developed a uniquely adversarial, and immensely profitable, way of doing business.
Enjoy the Labour Day long weekend, everyone!
I contribute to a defined benefit pension plan at work. How much will I get from the pension plan in retirement? That depends on when I retire or leave the plan. Hang on, we’re about to get math-y.
Normal retirement age is 65 and I joined the pension plan in 2009 at age 30. Retiring in 2044 (the year I turn 65) would give me 35 years of pensionable service.
The pension plan has a retirement calculator on its website. Curious about the amount of retirement income I’d receive at various ages, I took a look. The calculator just needed a couple of inputs: current salary, plus an assumption for future annual salary increases (I used 2 percent).
How Much Will I Get From My Defined Benefit Pension Plan?
Retiring at age 65 would max-out my pensionable service and give me an annual retirement income of $46,000 in today’s dollars.
But what happens if I don’t make it until 65? Retiring five years earlier at age 60 changes the equation substantially.
Retiring at 60
The defined benefit pension plan pays a bridge benefit from age 60 to 65, which is designed to ‘bridge’ the gap between retiring early and collecting CPP at age 65.
In my case the bridge benefit would be $11,000 per year in today’s dollars, plus regular pension payments of $39,225 per year.
So from age 60 to 65 I’d receive $50,225 in today’s dollars. After my 65th birthday I’d receive $39,225 from my pension every year for the rest of my life. For those of you counting at home that’s $6,775 less per year than I’d get if I retire at 65.
Retiring at 55
Let’s try another date. How much will I get from my pension if I retire early at age 55?
Again, using today’s dollars, I’d receive a bridge benefit of $8,800 per year from age 55 until my 65th birthday, plus regular pension payments of $33,025 per year.
That gives me a total of $41,825 from age 55 to 65, and lifetime pension payments of $33,025 thereafter.
Retiring early at 55 reduces my annual pension by $6,200 compared to retiring at 60, and reduces it by $13,000 compared to retiring at 65.
What if I leave the pension plan even earlier?
Leaving the defined benefit pension plan before age 55 – say at age 50 – means that I’d be entitled to what’s called a deferred pension payable on any date on or after my 55th birthday.
In this case my estimated pension, payable starting at age 55, would be $22,700 per year in today’s dollars. In addition, I would still be entitled to a monthly bridge benefit payable until age 65, estimated to be $5,800 per year.
Saving outside the plan
Going through the pension calculations is useful in helping determine my retirement plan – including when to retire, and how much I’ll have to save outside of my defined benefit pension plan to meet my retirement income needs.
I’m aiming for financial freedom and the flexibility to leave full-time employment early to pursue other hobbies and passions. That’s why I’m building up multiple income streams by saving inside of my RRSP, TFSA, and working on my online business.
I don’t want to live on $25,000 to $30,000 a year, so my plan is to generate at least that much or more through several different income streams in retirement.
Final thoughts
Fewer than three in 10 Canadian workers now have access to a defined benefit pension plan. These plans are often called ‘gold-plated’, but that’s only if you stick around and max-out your years of pensionable service.
While I’m grateful to have a solid pension plan, I don’t want those golden handcuffs to keep me chained to my desk for 35 years.
Last year hundreds of you signed up to watch me and dozens of other personal finance and investing experts speak at the Canadian Financial Summit. Well, we’re back with a fresh new line-up of information designed to make you better savers, investors, and take control of your financial future.
Get your free ticket today to access this virtual financial summit, which takes place online from September 12-15, 2018. You’ll be able to watch an all-star panel of 25+ Canadian personal finance experts, including yours truly, offering sessions that include:
- How to retire early and on your own terms
- How to invest better, easier, and more efficiently
- How to protect yourself from corporate chicanery
- How to see through financial jargon meant to confuse you
- How to negotiate the best deals for yourself
- How to avoid crippling fees and terrible advice
- How the Carbon Tax will affect your budget
- How to get your credit cards to pay you for buying what you were going to buy anyway
- How to earn hundreds more every week with innovative side hustles
- How to travel on the cheap to exotic locales
- And MUCH MORE!
Sign up for free tickets to the 2018 Canadian Financial Summit right here and you’ll also be eligible for the early bird discount for lifetime access to every single session for just $87. The All Access Pass also includes exclusive access to five expert sessions, plus other extras such as e-books, guides, and apps, that’ll make you a better saver and investor.
My session will be on September 14th and in it I explore some uniquely Canadian money misconceptions that I’m sure you have all heard, but now you’ll know how to debunk the next time your advisor, co-worker, or crazy uncle brings them up!
Just head on over to the Canadian Financial Summit, sign up for free, and be automatically entered to win one of the free Premium All Access Passes they will giving away when the event goes LIVE on September 12th.
This Week’s Recap:
On Monday we had a guest post from Dale at cuthtecrapinvesting.com where he questioned the four percent rule as a safe withdrawal rate for Canadian retirees.
Dale followed up that article with a great piece on Seeking Alpha looking at what the creator of the four percent rule had to say.
Back here on Friday I reviewed the new RBC InvestEase robo-advisor platform and gave it a thumbs-up as a great low-cost online investing solution.
Watch for the cover of Smart Money in the Toronto Star this Tuesday as I share my tips to maximize value from Aeroplan flight rewards while minimizing fees.
Weekend Reading:
Dear investor, that cocky voice inside your head is wrong. Why the findings from behavioural economics apply to everyone. Especially you.
Andrew Hallam on why the rich think they’re happier than research says they are.
Jason Heath shares three behavioural barriers to solid retirement planning, and how you can overcome them.
They thought they’d get rich. Then it all came crashing down. Hard lessons for cryptocurrency investors after the Bitcoin boom.
Emerging market stocks as a group are dangerously close to the accepted definition of a bear market. Ben Carlson gives a short history lesson on emerging market corrections and bear markets.
Investing has become a commodity in a sense that trading stocks and ETFs is now free on some platforms, while the cost of maintaining a portfolio of ETFs has never been cheaper. Here’s the Reformed Broker Josh Brown on why a portfolio is not a plan.
Here’s a throwback to Warren Buffett’s first television interview – Discussing Timeless Investment Principles:
Investment advisor Blair duQuesnay suggests we adopt these investing superstitions to avoid behavioural mistakes.
Here’s how pre-retirees can transition to a bucket approach for their retirement portfolio withdrawals.
Building a $1-million RRSP might not be as difficult as you think. Morningstar breaks down the math to help you achieve this goal (hint: start early).
Most Canadian caregivers are paying too much tax. Here’s how to remedy that.
Executor duties can be overwhelming. Jason Heath explains where to start.
My Own Advisor blogger Mark Seed lists 10 goals to achieve in 10 years to reach early retirement.
Rob Carrick calls out realtors and family members to stop pushing seniors to sell their homes:
“Seniors have often lived in their homes long enough that the value has doubled or tripled. This wealth brings out behaviour in others that may in some cases amount to financial abuse.”
Who killed Toys ‘R’ Us? Hint: It wasn’t only Amazon. A small group of hedge funds decided the iconic retailer was worth more dead than alive.
Finally, gold-plated coffins, Rolls-Royce hearses, and other lavish displays of wealth and power at funerals:
“Some go as far as flying loved ones abroad to watch as their body is pushed out to sea like Viking warriors and the boat set ablaze.”
Have a great weekend, everyone!