I recently coached a client through the process of transferring her existing RRSP, TFSA, and non-registered investment accounts away from high fee managed mutual funds and over to a self-directed investing platform. The goal was to reduce investment fees from an average of 2% on her balanced portfolio down to 0.25% with a balanced asset allocation ETF.

The asset mix wouldn’t change – both portfolios likely hold the same underlying assets – but the fee reduction is significant. It’s helpful to convert the percentage into a dollar amount. The combined portfolio size was roughly $1M, so at an average of 2% her fees were costing $20,000 per year. The new self-managed ETF portfolio would cost just $2,500 per year.

To be clear, switching to a low cost ETF portfolio is not a panacea for improving investment performance, especially in the short-term. A broadly diversified balanced portfolio is still down nearly 10% year-to-date. But by switching to a low cost ETF portfolio this client is all but guaranteed to outperform the similar high fee mutual fund portfolio over the long term.

You’d think the idea of saving $17,500 per year in investments fees would compel more mutual fund investors to make a change. But money is as much psychological as it is about the numbers. There may be a long-term relationship with the existing advisor mutual fund salesperson. He or she may even be a close family friend. Breaking up is hard to do.

When coaching clients through this process I always remind them that there’s no need to “break-up” with their advisor. The transfer of funds actually happens at the new financial institution. That’s right, if you want to move from “red” bank to “green” bank, you go to green bank and initiate the transfer from there.

Open an account at the new institution, then open the appropriate account types that mirror your existing account types (RRSP, TFSA, non-registered, spousal RRSP, LIRA, etc.).

You’ll eventually get to a section that prompts you to fund your new account with new contributions or by transferring funds from an existing account. Select that option and enter the account details from your existing institution (have a recent statement handy). Some platforms allow you to upload a statement, while others make you fill out the details manually.

Once the transfer request is accepted it can take about 10-14 business days for the funds to arrive. Your new institution contacts your existing institution to request the transfer on your behalf. 

You can transfer funds “in-kind”, meaning the portfolio moves over exactly as-is, or “in-cash”, meaning the existing institution will liquidate your entire portfolio and send a cheque to the new institution. 

Transferring in-cash is likely the preferable option in a registered account. That’s because there are no tax implications for selling your existing investments inside a registered account (RRSP, TFSA). This is not a withdrawal and a deposit – it’s a direct transfer between institutions where your funds remain in the same tax-sheltered account.

Transferring a non-registered (taxable) account requires more thought. That’s because selling your existing funds and transferring in-cash is considered a taxable event, triggering a capital gain or loss on each security sold. In this case, transferring in-kind may be a better option. 

Now, once your existing institution receives the transfer request then you should expect a phone call or email from your existing advisor asking what’s going on. Don’t be surprised if your advisor tries to talk you out of this transfer, or at least offers some parting words of wisdom.

It’s because of these often uncomfortable and awkward exchanges that I recommend initiating the transfer first before having the break-up conversation. You’re less likely to un-do what you’ve already done.

Related: Breaking up isn’t hard to do. How to transfer your RRSP.

Still, if you’re set on having the conversation ahead of time I’d recommend preparing a list of reasons why so you can respond to your advisor’s playbook of rebuttals. 

Go to Morningstar and look up your mutual fund performance versus its benchmark index and other funds in its category.

Mention the simplicity of an all-in-one portfolio and how it automatically rebalances for you. Talk about the diversification and how you’re staying invested in a similar asset mix with similar underlying holdings.

Finally, the closing line:

“It’s not you, it’s your fees.”

This Week’s Recap:

It has been a while. 

Last week I suggested it’s time to check in on your financial plan.

Earlier this month I looked at using annuities to create your own personal pension in retirement.

I was happy to be included as a panelist once again for MoneySense’s annual ETF All Stars. No surprise that my “desert island” pick is Vanguard’s All Equity ETF (VEQT).

Listen for me on an upcoming episode of the Rational Reminder podcast where I’ll be chatting with co-hosts Cameron Passmore and Ben Felix about breaking up with your mutual fund advisor and some of the incredible (and demonstrably false) rebuttals I’ve heard over the years.

Promo of the Week:

Interest rates are ticking up and yet some of you still have money parked in a big bank savings account earning a pitiful 0.01% – 0.10%.

It’s time to switch to EQ Bank’s Savings Plus Account and earn a healthy 1.50% on your emergency fund or other cash savings.

Remember, EQ Bank offered rates as high as 2.45% in March 2020 before emergency rate cuts kicked-in. As rates rise, expect some more upside here and a return to ~2% by the end of the year.

I use EQ Bank for my own emergency savings. I like that I can connect the account to my main chequing account and transfer funds within a day. I also like the fact that I can pay a bill or make an e-Transfer from EQ Bank and that there are no account fees.

Weekend Reading:

Worried about stocks? David Booth, founder of Dimensional Funds, explains why long-term investing is so crucial.

Retirees fear this falling stock market, but Andrew Hallam says our reactions to fear are more damaging than anything the markets or inflation could ever hit us with. 

As Rob Carrick explains, nothing happening with stocks and bonds lately will matter when you look back a decade from now.

Jesse Cramer explains why you’re probably using the 4% rule all wrong:

“You probably shouldn’t eat too much candy.” Is that an aggressive admonishment? Or a conservative suggestion?

If you’re a 9-year-old on Halloween, it’s aggressive. Don’t limit me! I want to eat all the candy!

But if you’re a paranoid dentist, it’s conservative. Why leave the door open to any candy consumption? Don’t you realize one mini Snickers can cause a cavity?!

The 4% rule is the same.

A must watch video by Preet Banerjee on how to manage your emotions when investing:

A really important white paper by PWL Capital’s Ben Felix on finding and funding a good life. It’s an overview of the non-financial considerations that deserve consideration in financial decisions.

Here’s Charlie Bilello on the biggest mistake an investor can make.

Crypto is a solution is search of a problem – or problems. So what is the point of crypto?

“People in the crypto space argue that it’s still early. We’re about 13 years in. At a time when technology changes rapidly, how early is that, really?”

Michael James on Money asks why do so many financial advisors recommend taking CPP early?

Finally, the great junk transfer is coming. A look at the burden (and big business) of decluttering as Canadians inherit piles of their parents’ stuff.

Enjoy the rest of your weekend, everyone!

I quit my full-time job in December 2019, three months before a global pandemic shut down the world. I watched my investments fall by 34% in the sharpest and most rapid market decline in history. I cancelled two European vacations.

While I did get a three-month head start on the whole work-from-home thing, my routine was quickly disrupted when schools shut down and my kids were sent home for online “learning”.

I dreamt of building my blog, writing, and financial planning business while travelling and working from anywhere with an internet connection. Life comes at you fast.

Instead of panicking and thinking I made a huge mistake, I stepped back and checked in on my plan. I still had a popular blog with a strong readership of people who respected my opinion. I had a secure freelance writing gig with no shortage of financial topics to write about. And I had a growing financial planning practice with an eager waitlist of clients.

Stuck at home, I doubled down on my business – writing more articles, taking on a reasonable number of clients, and finishing up the work to earn my financial planning designation. 

As we know, stock markets went on to recover their early 2020 losses and then some. My investments returned between 9 – 12% that year, depending on the account type. The LIRA I set up in April 2020 went on to return 22.5% thanks to the fortuitous timing of that lump sum contribution.

Business boomed that year and again in 2021 thanks to the work that my wife and I put in laying the foundation in early 2020.  

Fast forward to 2022 and markets are reeling again (although nowhere near as bad as March 2020). I’m still invested in Vanguard’s All Equity ETF (VEQT) across all accounts. I’m adding new money every month to our corporate investing account, picking up more units of VEQT at a discount. The way I see it, these new contributions have a higher expected return (over the long term) than they did 6-12 months ago.

Related: Exactly How I Invest My Own Money

Business is still strong, but I’ve lost a freelance writing client that made up a good chunk of income. I’m using that gift of time to work on a project that I believe can replace the missing income and fill a void in the market for want-to-be DIY investors, so stay tuned for that.

Meanwhile, I have clients at different ages and stages wondering how all of this *waves hands at everything* is going to impact their financial plan.

Should we change long-term inflation projections to 6% annually? Should we stay working for another year or more until all of this settles down? Should we sell our sensible investment portfolio and park the money in cash?

When I meet with clients I encourage them to zoom out and take a bigger picture view of their financial plan and future goals.

Are they still in their accumulation years? Are they still making regular contributions to meet their savings and investment goals?

Is their job secure? Have they negotiated a salary increase commensurate with the current inflation environment and tight labour market?

Have they looked at their own personal inflation calculator to see how their own spending stacks up against the CPI (our spending has trailed CPI by 0.6 – 2.5% over the past 12 months). Have they built in a spending buffer for the year to account for higher inflation and any unplanned minor expenses? 

Clients who are retired or getting close to retirement age may be more concerned about high inflation and poor investment returns. I remind them to focus on what they can control.

Perhaps a large one-time purchase gets delayed, for example. In most cases, we’ve built a buffer into their retirement spending that can be used for extra travel or hobby spending in good times, but can also help curb the rising cost of groceries and gas during higher inflation periods like this, or cover an unplanned expense.

I remind them of their safe withdrawal plan and that withdrawals can be spread out over the entire year (dollar-cost-averaging in reverse).

Related: Your Retirement Readiness Checklist

FP Canada issues guidelines every year that are designed to support financial planners when making long-term (10 or years more) financial projections.  The projection assumption guidelines look at items like expected wage growth (3.1%), borrowing rates (4.3%), inflation (2.1%), fixed income returns (2.8%), and stock returns (6.3% to 7.7% before fees).

Knowing the questions planners would be facing this year regarding inflation and stock return assumptions, FP Canada included some helpful guidance for planners to share with clients:

“It is not unusual for significant fluctuations to occur in the market over a short period of time. For example, a financial planner may be preparing a financial plan at a point in time following a marked increase in the stock market, or planning may occur following a major decline in the stock market.

Movements and fluctuations can also be seen in the release of Consumer Price Index results, such as a negative rate in May 2020 and then a rate near 5% in December 2021. In looking at a 2-year rolling average, 94% of the time the inflation rate was between 1%-3%, compared to 73% on a one year time frame. As of December 2021, CPI has averaged 2.32% over the last five years and 1.82% over the last 10 years.

Based on the current economic conditions, financial planners may be tempted to drastically change just one assumption, like increasing inflation to 4% for the entire retirement planning projection. By revising only the rate for inflation, the financial planner ignores the correlation that exists between inflation and interest rates and the cited asset classes. If inflation remains high, interest rates would typically go up, as well as the return on equities over the long-term. We recommend that financial planners use the projected economic assumptions as a whole and avoid attempting to personalize a forecast for the client by making a drastic adjustment to a single variable. Presenting alternate scenarios and projections to the client may be a better approach.”

Inflation will be tamed in time. Investment returns will increase in time. We have no idea when, or what will happen in the short-term. But we have much better information about long-term trends.

For instance, if expected global stock returns are between 6-8% per year on average over the very long term, and the previous 10-year period averaged 12.66% per year, that should tell us to expect lower returns over potentially the next decade. We should also expect a negative year from time-to-time. What we shouldn’t expect is global stocks to continue posting double-digit returns every single year.

Viewed through that lens and it’s no surprise to see that stocks are down so far this year. Does that mean you need to change your perfectly sensible portfolio of low cost ETFs? Of course not. Falling stock prices is a feature of their risk-reward trade-off, not a bug. But those who stick to their sensible strategy tend to be rewarded over the long term.

Final Thoughts

They say plans are worthless but planning is everything. Check in on your financial plan. Do the decisions you made at the time still hold up? Or should they change based on new information?

It’s normal to have second thoughts about your financial decision making when faced with high inflation, declining stock prices, a global pandemic, or an unprovoked invasion marking the biggest war in Europe since World War Two.

There’s no need to tinker with a low cost, globally diversified, and risk appropriate portfolio. It didn’t “stop working” just because prices have fallen. As Ben Felix says, your investment strategy shouldn’t change based on current market conditions.

Indeed, for those in their accumulating years, take advantage of falling stock prices and keep adding to your portfolio (just like it said to do in your financial plan).

If you’re in the retirement readiness zone, and nervous about your investments and inflation, it’s certainly reasonable to consider postponing retirement until the situation improves. Check in on your financial plan anyway, just to make sure you’re not just falling into the “one-more-year” trap.

Finally, if you’re already retired and spending down your investments then this environment can feel downright nasty. A financial check-in might be in order to see if your level of spending is sustainable, your investments appropriately allocated, and that your other assets and income streams have been optimized in your retirement plan.

Decisions can be revisited, like when to take CPP and OAS (if you haven’t already), whether you should downsize, or sell your home and rent, whether to complete that kitchen renovation or put it off for a year or two. These choices, that are within your control, can positively affect your retirement plan – more so than trying to hit a home run with your investments to make up for 2022’s losses.

If you’re ever looking for a sober second thought – an unbiased look at your financial plan and future goals – check out my fee-only advice page and give me a shout. I’d love to help.

*Sponsored by RBC Insurance*

The reason why retirement planning can be so difficult is because the one variable we need to know – how long we have to live – is impossible to predict. Sure, we have mortality tables and family history to help guide us, but statistically speaking, half the population will outlive their median life expectancy.

That makes longevity risk – the risk of running out of money before you die – a very real threat to your retirement. And yet many Canadians ignore this threat by not saving enough during their working years, retiring before they’re financially ready, taking Canada Pension Plan benefits too early, withdrawing too much from their RRSPs, and so on.

On top of that, a global pandemic and recent economic uncertainty has had a significant impact on seniors and their retirement plans. RBC Insurance conducted a survey of Canadians aged 55-75 in March 2022. The survey data showed that:

• One third (33%) of Canadians say they retired sooner than planned, or intend to change the date of their retirement because of the pandemic
• Among already retired Canadians, more than one quarter (28%) are spending more than they anticipated, while four in ten (41%) have experienced unexpected expenses
• As Canadians live longer the impact of inflation on their savings, expenses and purchasing power is the most pressing concern for the majority (78%), as well as a lack of guaranteed income (47%), outliving their savings (48%) or their spouse (38%), feelings of loneliness (36%) and not having a legacy to leave behind (25%)

Having enough money to support their desired lifestyle is a real concern, highlighted by the fact that nearly half (48%) of those surveyed are worried about outliving their retirement savings.

How Annuities Can Help In Retirement

One way to protect against longevity risk is to purchase an annuity. Annuities fell out of favour (if they ever were in favour) when interest rates plummeted over the past 10-15 years. But with interest rates on the rise, annuities are certainly worth another look.

An annuity provides a predictable income stream for life – much like how a defined benefit pension, CPP, and OAS pays benefits for as long as you live. Nothing protects you from longevity risk quite like having a guaranteed income that’s paid for life.

It’s puzzling why more Canadians don’t choose to turn even a portion of their savings into an annuity – to pensionize their nest egg, to borrow a phrase coined by financial authors Moshe Milevsky and Alexandra Macqueen.

Lack of knowledge around annuities may also be why only 7% of those surveyed are taking advantage of them.

Let’s break down some of the advantages:

• You have the option to continue your payments to your spouse or beneficiary if you pass away during a certain time period.
• Your payments are locked in the moment you purchase a Payout Annuity. You don’t have to worry about what the market does or where interest rates go. Your income is guaranteed.
• It’s possible to invest in an annuity using your RRSP and/or RRIF savings, or non-registered savings.
• When purchased with non-registered funds, the interest portion of your monthly payment is spread out evenly over the Payout Annuity’s life. This levels out your tax payments and minimizes the taxes you pay.
• You can stagger your annuity purchases to help increase payouts.

Annuity Payout Rates (How Much Will You Receive?)

Speaking of payouts, I thought it would be helpful to see some examples of just how much income to expect from an annuity based on several different scenarios:

*Calculations made at https://www.rbcinsurance.com/annuities/index.html

I’ll be honest, I perked up when I saw the payout rates were between 5 and 7 percent of the initial deposit. Now, keep in mind, those rates won’t increase with inflation each year, but it’s still a healthy (and guaranteed) amount to receive for life.

I mean, why wouldn’t a relatively healthy 70-year-old male not want to turn $250,000 into annual income of $16,856?

The break-even age on that $250,000 investment would be 85 years old (84.83 to be precise). But a 70-year-old male has a 50% chance of living until age 89. By that time, he will have collected $320,264 in annuity payments. That’s impressive, considering he is receiving 6.74% of the initial balance each year.

Remember, we’re talking about protection against longevity risk. As tragic as it would be to get hit by a bus in the year you purchased an annuity, you won’t be around to curse the decision and, if you get a 10-year guarantee period, you’ve built in some protection for your beneficiaries.

Quick Facts About Annuities

Your annuity income is determined at the time you buy the annuity and is based on several factors such as interest rates, age, and your life expectancy.

Your payments will be higher if current interest rates are high (and vice-versa).

The older you are when you buy the annuity, the higher your payments will be because you’re not expected to live as long.

Men will receive more money than women because they have a lower life expectancy.

There are many types of annuities, including:

• Single life annuity – guaranteed income for the life of one person
• Joint life annuity – guaranteed income for the lives of two people
• Term certain annuity – guaranteed income for a set period of time

You can also customize your annuity to include:

• A minimum payment guarantee if you (or you and your spouse) pass away before the end of the guarantee period (ranging from 1 to 25 years), remaining payments will be paid to your beneficiary
• A return of premium guarantee where your entire premium deposit is refunded to your beneficiary if you (or you and your spouse) pass away before you receive your first annuity payment.

Under-spending In Retirement

One last thing on the annuity puzzle. Some proponents argue that annuities not only protect against longevity risk, but also the risk of under-spending in retirement.

A U.S. study found that roughly two-thirds of retirees who have $150,000 in savings at age 65 tend to spend no more than they receive from guaranteed income sources, such as Social Security and pensions. They’re afraid to spend the lump sum because they value liquidity.

An annuity, being a guaranteed income source, would make it possible to spend a bit more freely in the early years of retirement.

Final Thoughts

Annuities can play a vital role in your retirement planning by helping to mitigate the threat of outliving your money while providing a predictable income stream for life.

I’m not suggesting you turn every penny of a million-dollar portfolio into an annuity but carving out a portion to create your own personal pension will add another valuable and guaranteed income stream that you never have to worry about managing in retirement.

RBC Payout Annuities are provided by RBC Life Insurance Company.