Weekend Reading: Let’s Talk Inflation Edition

By Robb Engen | August 29, 2020 |
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Weekend Reading: Let's Talk Inflation Edition
Since 1991, the Bank of Canada has used an inflation-control target framework to guide Canada’s monetary policy. The goal is to keep inflation at 2%, the mid-point between its target range of 1-3%. The inflation target framework is reviewed every five years, with the most recent agreement in place until the end of 2021.

The current inflation targeting framework aims to keep inflation low and predictable. This allows individuals and businesses to make long-range financial plans that will contribute to the well-being of our economy. This approach has largely been successful, with price increases averaging around 2% for three decades. That’s a far cry from the inflation-ravaged late 1970s and early 1980s, when inflation peaked at more than 12% in 1981.

It’s fair to say that the extraordinary stimulus measures resulting from the Covid-19 pandemic has forced central banks and governments around the world to review their monetary policy framework as it relates to deficits and inflation. 

Earlier this week, U.S. Federal Reserve chair Jerome Powell announced a major shift in how the central bank will help guide the economy with a focus on low interest rates and job growth. It will tolerate slightly higher inflation in an effort to achieve maximum employment.

North of the border, the Bank of Canada is also reviewing its approach to monetary policy and exploring potential alternatives. It released a “Let’s Talk Inflation” survey – open until October 1 – to get feedback from Canadians on how the current inflation targeting framework affects them and how it compares to other potential alternatives. 

Reading between the lines, it’s clear that the Bank of Canada is seriously considering a shift in approach – one that will likely mirror the Federal Reserve’s new “tolerance” for higher inflation in the pursuit of job growth.

Take the Bank of Canada survey here and let me know your thoughts on inflation in the comments below.

In the meantime, if you’d like to better understand how monetary policy actually works, I highly recommend Stephanie Kelton’s aptly-time book, The Deficit Myth. You’ll see why central banks are on the right track with their thinking around inflation and job growth, and why governments on both the left and right screw it up by equating government spending with household spending.

This Week(s) Recap:

Our kids are heading back to school next week and so our stay-at-home summer is officially coming to a close. We are anxious about sending the kids back but we’re looking forward to the new routine. Obviously my wife and I are incredibly fortunate that we both stay home full-time and don’t have to balance childcare and working arrangements. I know many other parents aren’t so lucky.

Last week I shared how to give financial advice to your Millennial and GenZ kids

I also looked at preparing for retirement and understanding your new spending patterns.

This week I shared the risk of carrying a mortgage into retirement

Promo of the Week:

Like many of you, we’ve been doing a great deal of shopping online during the pandemic. Whenever I do, I try to remember to visit an online cash back rebate site first to earn an extra percent or more on the purchase. It’s like doubling up on your credit card rewards. There’s two sites that I visit regularly to take advantage of cash back rebates: Great Canadian Rebates and Rakuten (formerly Ebates.ca):

Become a member of Great Canadian Rebates and take advantage of online coupons and earn cash back rewards. GCR features over 400 merchants to satisfy all your shopping needs.

Rakuten pays you cash back every time you shop online, and it’s FREE to join. Sign up now and when you spend $25 you’ll earn a $5 cash back bonus.

You can also read my Great Canadian Rebates vs. Ebates Canada comparison guide here.

Weekend Reading:

The Credit Card Genius team put together a study on what your credit card benefits are really worth. It looked at nine major credit card perks and put a dollar value to each of them. Great stuff!

Read why Irrelevant Investor Michael Batnick will never go to a car dealership again. I have to agree.

The editorial board at the Globe and Mail says that a fight in Canadian real estate reveals the true problem: We need a lot more housing.

An incredible look at the decline of upward mobility in one chart by Visual Capitalist.

The five largest stocks in the S&P 500 have a market capitalization that equals the smallest 389 stocks in the index. Simply incredible.

This T.E. Wealth blog dives deeper into both the Canadian and U.S. markets to show how a select few companies are truly driving stock returns.

PWL Capital’s Justin Bender gives us an excellent explanation of the expected future returns for Vanguard’s asset allocation ETFs. Hint, investors should lower their expectations:

On the other hand, Andrew Hallam explains how all-in-one portfolios proved their worth during Covid-19.

Morningstar’s Susan Dziubinski and Christine Benz discuss why young investors shouldn’t dabble in stocks. I get the idea of making mistakes early and chalking it up to a learning experience. But I’d rather young investors not lose money gambling on individual stocks and just get it right from the start with a broadly diversified indexing strategy.

Coronavirus is creating retirement insecurity. These 10 steps can defuse the time bomb of an ageing population.

The sandwich generation. Why adult children looking at supporting their parents need to consider the impact on their own financial goals.

One of the original personal finance bloggers, JD Roth gives us the true history of financial independence.

The Family Money Saver blog looks at why people don’t do F.I.R.E.

Steven Arnott, author of The Snowman’s Guide to Personal Finance, wrote an excellent case study on preparing for retirement.

A guest post on the My Own Advisor blog looks at whether you should only put 5% down on your mortgage and invest the difference.

Here’s why we won’t remember much of what we did in the pandemic:

“But I doubt I am alone in finding that my memory of the lockdown months is rather thin. No matter how many new people or old friends you talk to on Zoom or Skype, they all start to smear together because the physical context is monotonous: the conversations take place while one sits in the same chair, in the same room, staring at the same computer screen.”

Finally, a neat futuristic look at what the coronavirus will do to our offices and homes.

Have a great weekend, everyone!

The Risk Of Carrying A Mortgage Into Retirement

By Robb Engen | August 25, 2020 |
Posted in
A mortgage-free home is the cornerstone of any solid retirement plan. Indeed, decades ago it would have been considered a major financial sin to carry a mortgage into retirement. But times are changing. The proportion of seniors with mortgage debt has almost doubled from 8% to 14% (from 1999 – 2016). Seniors also have the highest rate of mortgage delinquency. 

What’s going on here?

Carrying a Mortgage Into Retirement

As you prepare for retirement, one useful financial planning hack is to match your mortgage amortization with your retirement date so that you can retire with a clean balance sheet, so to speak. This is especially helpful for those who bought a home (or upgraded their home) later in their career, when a typical 25-year amortization wouldn’t see the mortgage paid off until well beyond retirement age.

But I’ve had several clients in my fee-only financial planning practice ask me about carrying a mortgage balance into retirement. They wonder if it makes sense to pay off the mortgage faster when interest rates are at record lows (some had mortgage rates below 2%). Wouldn’t that money be put to better use investing in a diversified portfolio of ETFs – particularly if there’s still unused RRSP contribution room?

Related: Boosting Retirement Savings During Your Final Working Years

To be fair, carrying a mortgage balance into retirement isn’t necessarily a bad thing, if done with well thought out reasons (like prioritizing investments in a low interest rate environment). But this assumes you have the available cash flow to top-up your mortgage or your investments. It also assumes your retirement outcome doesn’t hinge on having a paid-off home and that you’ll have sufficient sources of income to pay your bills.

There’s plenty of evidence to suggest that’s not the case for many seniors today. A Statistics Canada study showed that working seniors were more likely to have debt than non-working seniors, which suggests they might be staying in the workforce longer in order to pay off debt. 

Senior immigrant families had twice as much debt as Canadian-born families (but 1.5x more assets). Single seniors had lower debt and asset levels than couples and other family types.

Alarmingly, those aged 55-74+ were the only age group that posted an increase in the number of mortgages held versus last year:

Growth of Mortgage Debt in Retirement

I reached out to mortgage expert Rob McLister of Rates.ca for his thoughts on the growing trend of mortgage debt in retirement. He said that carrying a mortgage or HELOC balance into retirement is obviously not something most seniors aspire to do.

“With shelter prices consistently exceeding income gains, poor retirement planning and incessant cost of living increases, it’s a growing reality, said Mr. McLister.”

There’s also a greater propensity for parents to help their kids get into the housing market, with nearly half of millennial homebuyers getting financial help from the bank of mom & dad.

Mr. McLister says that parents who don’t have 20+ years of retirement savings banked should think very carefully about how much they gift their kids.

“It worries me that people are relying so much on home equity to survive their golden years.”

There’s also the notion that surging home values (especially in Toronto and Vancouver) give people the illusion that they don’t need to save as much, which Mr. McLister says is almost guaranteed to be a problem for people who exceed the standard life expectancy.

Home prices may not beat inflation for long periods of time in the future, and depending on where you live in Canada may not have kept up with inflation over the past 10 years.

The run-up in house prices has fuelled the growth of another trend – reverse mortgages. These products, once considered a last resort for retirees, are now growing at 3-4 times the year-over-year growth of regular mortgages. It’s driven partly from the fact that many seniors have very little in terms of savings and investments, instead relying on rising home equity prices to increase their net worth.

The trouble is you need to live somewhere, and so unlocking your home equity becomes a major challenge if you don’t want to downsize or sell your home and rent in retirement.

Mr. McLister says the reverse mortgage market growth has been driven mainly by plunging interest rates, growing senior debt loads, more aggressive marketing, and increasing acceptance of “equity release” (that’s what they call it now) as a retirement planning strategy.

Note that if you have to borrow and can qualify, the lowest-cost option for extra cashflow in retirement is a HELOC at prime to prime + 0.60%. With this option you can pay up to 40% less interest over 10 years, but you’re making monthly interest payments the whole time.

Pitfalls to Avoid in Retirement

Given this growing reality of seniors carrying debt into retirement, I asked Mr. McLister to share some tips around using a HELOC. 

Tips if you get a HELOC as a retirement safety net:

  • Keep the limit at 75-80% of what you’d qualify for with a reverse mortgage. That way, worst case, you can pay off the HELOC with a reverse mortgage to eliminate the monthly interest payments.
  • Apply for a HELOC before you retire when your income is higher
  • Monthly interest payments can ding your cashflow so many seniors with HELOCs borrow off the HELOC to pay the interest (i.e. capitalize the interest).
    • If you’re going to do this, deposit your paycheque into the HELOC and use it as your chequing account. That way the lender see you’re still making regular principal payments and not just racking up debt. The Manulife One is easily the best of breed for this purpose but I’d suggest trying to negotiate the prime + 0.60% HELOC rate.

Final Thoughts

It’s tough to pinpoint exactly why so many seniors are carrying mortgage debt into retirement. One reason is that interest rates have been extremely low for a long time and so perhaps many seniors have prioritized investing over paying off their mortgage. As long as they have enough income to cover their monthly payments then everything should be fine and the mortgage will be paid off, eventually.

More troubling, though, is the increasing level of indebtedness – either from excessive borrowing or from a home purchase later in life where the amortization schedule doesn’t line up with a typical retirement age. This forces more seniors to work past age 65 in order to make their monthly payments. Not ideal.

I’ve made a conscious choice to prioritize my RRSP, TFSA, and even non-registered investments before I start aggressively paying off my mortgage. But I’m 41 and still in the accumulation phase. I prefer to invest now rather than pay off my 1.45% mortgage debt.

That’s me, though. Many of my clients focused on paying off their mortgage and tell me they’re glad they did. More than just numbers on a spreadsheet, it’s the psychological effect of being debt-free that increases happiness. It’s something I’ll keep in mind as I inch closer to early retirement.

What are your thoughts on carrying a mortgage into retirement: Cardinal sin, or new reality?

Preparing For Retirement: Understanding New Spending Patterns

By Robb Engen | August 19, 2020 |
Posted in
Preparing for Retirement: Understanding New Spending Patterns
Last week we talked about boosting retirement savings during your final working years. In an ideal world you’ll have the double-effect of being in your peak earning years while your largest financial obligations are in the rear-view mirror.

In the real world, however, many Canadians are faced with an uncertain retirement because they lack adequate savings, don’t have a company pension plan, they’re still carrying a mortgage, line of credit, or even (gasp!) credit card debt, or they’re still providing financial support to their adult children.

Preparing for Retirement

Much like preparing for a new addition to the family, or for one spouse to stay home with the children full-time, preparing for retirement is about understanding new spending patterns.

If your final working years aren’t spent in savings overdrive mode, perhaps there’s time to test out your retirement budget in the year or two before you retire. You might as well try living on 40 – 60% of your income while you’re still working to see if it’s realistic.

If it’s not, there’s still time to adjust course by altering your income expectations, working longer (and saving more), or revisiting your investment strategy. Speaking of which…

Investing in Retirement

One of the biggest worries for retirees is outliving their money. That’s why it’s crucial to have a proper investment strategy in retirement. Investors don’t simply sell their stocks and move to bonds, GIC’s and cash once they retire. Canadians are living longer and our portfolios need to be built to last.

One strategy to consider is the bucket approach. The idea is that while retirees need cash flow, they also need a diversified portfolio of stocks and fixed income. Your first bucket is for immediate needs and should contain one or two years’ worth of living expenses in easy-to-access cash. Bucket two is for medium-term needs and is filled with bonds or GICs. Bucket three is meant for long-term needs and so it’s typically filled with stocks, ETFs, or index funds.

Also read: A better way to generate retirement income

Understanding CPP and OAS benefits

Whether you think you’ll rely on government benefits or not, it’s important to understand how CPP and OAS benefits work and how they might impact your retirement income plan.

The maximum monthly payment amount for CPP in 2020 is $1,175.83, but the average monthly amount for new beneficiaries is actually $696.56. You can take CPP as early as 60, but the amount is reduced by 0.6% for every month you receive it before 65.

Alternatively you can delay taking CPP until as late as age 70. In this case your pension amount will increase by 0.7% for each month you delay receiving it up to age 70.

OAS pays a monthly maximum of $613.53. Unlike CPP, which is tied to your employment history, you can receive OAS even if you have never worked or are still working.

While you can’t take your OAS pension early, you can delay receiving it for up to 60 months in exchange for a higher monthly amount – up to a maximum of 36% at age 70.

Related: Why You Should (Or Shouldn’t) Defer OAS To Age 70

As you can see, there are advantages to delaying your government benefits. Namely, if you expect to live a long and healthy life, and have sufficient income to meet your needs through to age 70, it makes sense to delay taking CPP and OAS.

New Retirement Reality Check

It used to be rare to retire with a mortgage, and unheard of to have your adult children still living at home. But today, with four in 10 Canadians aged 55-64 still carrying debt, and 15% still supporting their adult children, there’s a new retirement reality setting in.

It brings a level of uncertainty to retirement as lifestyles get adjusted on the fly and new spending patterns emerge. It means working diligently, on your own or with a financial planner, to ensure retirement expenses don’t exceed your income target.

The goal is to feel comfortable with your finances during retirement, and you can do so by either by working with a financial planner or having a good enough knowledge of personal finance to go it alone.

Final Thoughts

More than ever, preparing for retirement today involves careful financial planning and an open mind. You need to understand how to keep investing effectively while in retirement, determine when to take CPP and OAS, and understand how those government benefits fit in to your retirement income plan.

As your mortgage is nearing its end, you need to decide how comfortable you are carrying debt into retirement. Then, to add another wrinkle to your retirement plans, there is your adult children (or grandchildren) to consider, and how much (if any) financial support you wish to provide for them.