Fred Vettese is a leading expert in retirement planning and his books, which include The Essential Retirement Guide and Retirement Income for Life, are must reads for retired or soon-to-be retired Canadians. The newly updated second edition of Retirement Income for Life will be released on October 20, 2020.
The Rational Reminder podcast had Mr. Vettese on as a guest this week to explore the vast topic of retirement income. The conversation, according to co-host Cameron Passmore, was nothing short of a master class in retirement planning. Indeed, it was.
Those familiar with Mr. Vettese’s writing will know he’s a big fan of delaying CPP until age 70 – with the specific intent of spending personal savings from age 65 to 69 to fill the gap in retirement income. Deferring CPP by five years not only enhances your benefits by 42%, but it may also increase that amount by up to 50% thanks to annual indexing of both the benefit and the CPP maximum.
He’s less enthusiastic about taking OAS at 70 due to a lesser enhancement (only 36% if you defer five years), and because it’s difficult to convince people to defer both pension programs while they spend down their own personal savings. Mr. Vettese did say that at age 67 he still has not applied for his own OAS benefits and will likely wait until age 70 to do so.
Annuities were a big topic of conversation but, while Mr. Vettese is a fan of ‘pensionizing’ a portion of your retirement income, he’s not thrilled about today’s ultra-low interest rates and how that impacts annuity payouts. Furthermore, he said to avoid annuities index to inflation (if you can even find one) because they are more expensive and instead opt for a joint and last survivor annuity that’s payable for life for you and your spouse.
The indexing argument was interesting, as Mr. Vettese looked at longitudinal studies in Germany and Britain that showed how spending in retirement closely tracked inflation during their 60s, and then seemed to slow down rapidly from age 70 to 75, and then keeps on slowing down throughout their 70s and into their 80s.
The conclusion taken from these studies was that the kind of income people should be looking to secure for themselves in retirement would be an income that’s growing with inflation in their 60s, and then growing with inflation minus 1% in their 70s, and inflation minus 2% in their 80s – which means no inflation adjustments to their income at all after age 79.
There was a bit of a “this time is different” tone to the conversation as Mr. Vettese explained why low interest rates are here to stay for the foreseeable future thanks to our aging population.
I find Mr. Vettese’s arguments refreshing as he takes an evidenced-based view on retirement planning and offers contrarian conclusions about saving, investing, and spending in retirement. No, we don’t need to spend 70% of our pre-retirement income in retirement. We can also spend more than 4% of our investments, especially if we can defer CPP to age 70 and lock-in that enhanced benefit for life.
Listen to the entire episode to hear what was truly a master class in retirement income planning.
This Week’s Recap:
No new posts from me this week – our kids completed their ‘at home’ schooling last Friday so they’re officially on summer break. That meant slower mornings and more time spent outside enjoying the beautiful southern Alberta weather.
Our new hot tub was delivered and installed on Monday. We also had some minor roof and siding repair completed this week.
I’m on day 39 of trying to set up a corporate investing account at Questrade. The process is already cumbersome due to required extra documents such as a personal guarantee that must be notarized and mailed in. Despite receiving all of the completed documents on June 16th, the account still hasn’t been approved and opened for trading. Frustrating.
Look for my bi-annual net worth update next week as I document my journey to achieve a $1M net worth by the end of the year. Spoiler alert: the market crash in March did not help the cause.
Many thanks to Rob Carrick for including my post about asset location in his latest Carrick on Money newsletter.
Weekend Reading:
Credit Card Genius explores a topic near and dear to me – is credit card churning a lucrative hobby or risky business?
The FIRE movement attracts a special kind of person who wants to escape the drudgery of a 9-5 cubicle and live on their own terms. Here’s why the early retirement portion of FIRE is the wrong goal.
One of the biggest influences on the FIRE movement is Mr. Money Mustache, and in this exclusive interview he breaks down how you can slash your expenses and save far more money while still enjoying life.
Speaking of enjoying life, the idea of a four-day work week has been tossed around lately. Canadians want a four-day work week, but would it work?
Millionaire Teacher Andrew Hallam says retirees need these two things to boost their odds of success.
Deferred Sales Charges (DSC) have been banned in most provinces, but not in Ontario – where its DSC rules promote wealth inequality.
How has personal income been affected by COVID-19? The latest episode of SPENT looks at income loss by age, as well as who has seen the most outright job loss and who has more partial declines in income:
The incredible amount of government stimulus handed out during the coronavirus crisis gives us a real-life experiment of what a universal basic income might look like and what it could accomplish. But did you know that, 46 years ago, Canada ran its own universal basic income experiment in Dauphin, Manitoba?
“At the time it was the most ambitious social science experiment ever to take place in Canada, and saw rates of hospitalisations fall, improvements in mental health, and a rise in the number of children completing high school.”
Meanwhile, studies in the U.S. found that the vast amount of federal aid has capped a rise in poverty, but warns that families could again be vulnerable if/when aid expires next month.
One of the key differences between a calamity like the Great Depression and the economic crisis we’re facing today is the policy of the federal reserve.
A terrific post by Barry Ritholtz about how past claims of radical change fail to pan out, and why you should be skeptical every time you hear, “this changes everything.”
Rob Carrick says deferring OAS payments is a helpful retirement income strategy with a public relations problem.
It seems like everyone is getting into day trading or at least dabbling in individual stock investments. Morningstar’s Christine Benz explains why individual stocks is not the best way to get started with investing:
“I know that many people learned about investing through their Disney shares yadda yadda but I think we need to be clearer about this when we discuss financial education.”
Speaking of day traders, here’s what investors can learn from all the new Robinhood traders and a professional poker player.
The above piece references Barstool Sports founder Dave Portnoy, who now leads an army of former sports gamblers turned day traders. A Wealth of Common Sense blogger Ben Carlson goes back in time to profile Joe Granville, the original Dave Portnoy.
Annie Duke and Morgan Housel explain what the coronavirus pandemic and the resulting market volatility has to teach us about risk, uncertainty, and investment decision making.
The Sustainable Economist Tim Nash takes an in-depth review of Wealthsimple’s new SRI portfolios. His TL;DW – “Very promising. Won’t make everyone happy, but a welcome addition to the market. The strictest I’ve ever seen on gender diversity at the board level.”
A common question these days: should you exit a defined benefit pension plan? Here are my thoughts from my own pension decision.
Pattie Lovett-Reid talks COVID-19 and setting up seniors for financial success. Some good points on wills and power of attorney.
We know that high mutual fund fees can steal thousands of dollars from your retirement savings — so here’s a better way.
As hotels prepare to re-open, guests can expect plenty of changes such as mandatory masks, plexiglass shields, contactless check-in and no coffee makers in rooms.
Finally, last year Squawkfox money blogger Kerry Taylor was diagnosed with Triple Negative Breast Cancer (TNBC). She bravely shares her experience with breast cancer, including early detection, in hopes this could save someone’s life.
Stay healthy, everyone!
It’s no secret that mortgage rates have been incredibly low for an incredibly long time. Even when we think rates couldn’t possibly go lower, a lender tests the waters with another record-low promotion. This time it’s HSBC with an unprecedented 5-year fixed mortgage rate of 1.99%.
But as mortgage broker Dave Larock points out, there’s more for borrowers to consider than just interest rate alone. With HSBC’s offer, for example, the mortgage must be a high-ratio mortgage (less than 20% down so that it comes with borrower-paid mortgage default insurance).
Cheap mortgage rates also tend to come with less flexible terms. That means you may not enjoy the same pre-payment privileges (allowable annual lump sum payments, and double-up monthly payments) as you would with a different mortgage provider.
More importantly, as Mr. Larock points out, five-year fixed rate mortgage terms can be expensive to break if the borrower wants to refinance or is forced to sell their home. He says if a borrower needed to get out of the HSBC 1.99% five-year term after just two years, they’d be charged a penalty of $23,000.
A more flexible lender, in Mr. Larock’s example, currently offers a five-year fixed rate term at 2.13% and would only charge a penalty of $2,000 to break the mortgage after two years.
On the surface, a borrower would save $2,612 over five years by choosing the HSBC 1.99% rate. But is that worth giving up the flexibility (and potentially punitive penalty) of breaking the mortgage at some point in the next five years?
Borrowers by and large prefer five-year fixed rate mortgage terms, often to their detriment. Consider that an estimated 68% of mortgage holders choose a five-year fixed rate term, but more than 60% of mortgages will be paid out or restructured within 36 months. Don’t be one of these all-too-often told news stories about a borrower being forced to pay an obscene amount to break their mortgage.
Mortgage rates are incredibly cheap today, and have been for many years. But as I concluded in this piece about renewing your mortgage, your decision shouldn’t rest solely on getting the lowest mortgage rate. Flexible terms matter, both for paying down your mortgage early, and for the ability to break your mortgage without punitive charges.
This Week’s Recap:
On Wednesday I explained why you should forget everything you’ve heard about asset location and just hold the same asset mix across all of your accounts.
Over on Young & Thrifty I compared investing in real estate vs. investing in stocks.
Promo of the Week:
I still get a surprising number of emails from readers looking for the best high interest savings account. Savings rates have fallen sharply since the pandemic hit and the Bank of Canada made emergency rate cuts. The big banks pay next to nothing on their savings accounts, and even a former market leading online bank like Tangerine has cut its rate to just 0.25%.
I know I keep harping on this but I’ll mention once again that EQ Bank’s Savings Plus Account pays 2% interest with no promos or teasers. It’s a great place to park your short-term cash savings or an emergency fund. And, it comes with some chequing account functionality like e-Transfers and bill payments.
Open an account here and fund it with $100 within 30 days and you’ll get a $20 cash bonus for free.
Weekend Reading:
Sticking with the mortgage and housing theme, Alexandra Macqueen shares six strategies for first-time home buyers.
Stephanie Hughes wrote a great piece summarizing the 2020 CMHC saga – CEO Evan Siddall versus the world.
Ask a real estate agent or mortgage lender if it’s a great time to buy and you can guess the answer. A mortgage agent takes that sentiment one step further, offering this dangerously bad take:
“A $500,000 property you bought today will be worth $873,000 in 10 years. That’s an average of 7.45 percent annual increase, beating a medium-risk investment portfolio.”
Rob Carrick shares five numbers that will douse any high hopes you may have for the housing market.
Credit Card Genius determines which Canadian rewards program is worth the most.
In episode three of SPENT, Preet and Derrick discuss the impact of COVID-19 on the travel industry, and how it will change in the future:
Speaking of travel, The Guardian offers a sobering take on how to reinvent a tourism industry that does so much damage to our culture and climate.
Wealthsimple has introduced a new Socially Responsible Investing portfolio with lower fees and more stringent filters that weed out bad companies and even industries.
Is your ETF portfolio actually diversified? Maybe not if you invest in a market-weighted S&P/TSX Composite index, or S&P 500 ETF.
With post-secondary education looking much different this fall, many high school graduates are weighing the benefits of taking a gap year.
Taking a gap year usually means traveling or working. With travel not looking likely, more young people will be looking for work. Global’s Erica Alini explains who is hiring right now.
This New York Times piece warns that a tidal wave of bankruptcies is coming in the United States:
“The flood of petitions from the worst economic downturn since the Great Depression could swamp the system, making it harder to save the companies that can be rescued, bankruptcy experts said.”
My Own Advisor Mark Seed explains the tricky subject of when to sell a stock after a dividend cut.
With a dramatic rise in day trading, Ben Carlson says it seems crazy that we would see such speculation during the most severe economic crash of our lifetimes. But speculation is as old as the hills.
Finally, a new evaluation of Old Age Security reports that only 17% of Canadians were aware they could defer their Old Age Security pension. Here’s what I wrote about whether to defer OAS to age 70 or not.
Have a great weekend, everyone!
It’s hard to believe that just three months ago we were preparing to travel to Italy. It was one of several trips we had planned for 2020, including a return to the U.K. in July and a trip to Victoria to close out the summer. Then COVID-19 hit and our plans quickly changed.
Italy was cancelled (obviously), but we held onto our U.K. booking until travel and refund policies became more clear. That changed last week when our return flight was cancelled by the airline. That was the sign we needed to cancel the remainder of our trip.
Some countries are preparing to loosen travel restrictions in hopes to welcome international travellers this summer. But the Government of Canada is still advising Canadians to avoid non-essential travel until further notice.
Interprovincial travel is also still widely discouraged, although restrictions vary across provinces. The BC government says, “Now is not the time to travel for tourism or recreation.” That likely spells the end for our planned trip to Victoria in late August.
Our flights to Italy and the U.K. were booked through Aeroplan and so when we cancelled our miles were returned and fees & taxes were 100% refunded by Air Canada. Thousands of Canadians haven’t been so lucky with their cancelled travel plans, as airlines have been issuing travel credits instead of cash refunds.
We booked our flights to Victoria through WestJet, which is likely subject to the travel credit policy should we cancel.
What’s Next for Travel?
We’re prepared to spend summer at home and have adopted a wait-and-see approach to future travel. While we’d love to have a do-over next year and re-book our trips to Italy and the U.K., there’s just too much uncertainty to do anything as long as Canada’s travel advisory remains in place.
We’re also thinking about how the travel experience will change due to COVID-19. Additional screening at airports will make the check-in and arrival process even more cumbersome. Will airlines continue to leave the middle seat open and operate at 70% capacity or less? What impact will that have on airfare? Will we be required to wear masks on-board the aircraft? How will that work on longer flights with meal service?
When it comes to accommodations, would you prefer to stay at a hotel or a short-term rental (Airbnb)? I’m leaning towards Airbnb. Why?
Most hotels are poorly equipped to operate in a COVID-19 world. You have hundreds of travellers arriving from all over the world. There are way too many touch points, including check-in, baggage handling, and the ubiquitous restaurant buffet.
Many Airbnbs offer keyless entry and guests can do their own additional cleaning and sanitization to suit their comfort level.
While we dream of travelling in a post-COVID world, we’ve changed the way we collect and redeem credit card rewards. I switched to a cash back credit card – the Scotia Momentum Visa Infinite card – to earn more money back on groceries and other essentials. We’re also collecting and redeeming more PC Optimum Points.
In the meantime, we’re sitting on 600,000 Aeroplan miles – ready to deploy once it’s safe to resume international travel again.
This Week’s Recap:
Earlier this week I wrote about how and when to rebalance your portfolio.
Over on Young & Thrifty I explained how to invest your money in 2020.
At Greedy Rates – the stock market might crash, but what does that mean for your investments?
I applied for 13 credit cards last year. Here’s what that did to my credit score.
Promo of the Week:
Last week I highlighted EQ Bank as a great place to park your emergency fund or cash savings. Of course, their website was undergoing maintenance last weekend and many of you weren’t able to sign up. So, once again, here’s a plug for EQ:
EQ Bank’s Savings Plus Account consistently offers an everyday high interest rate at or near the top of the market with no hassles. Open an account here and fund it with $100 within 30 days and you’ll get a $20 cash bonus for free.
Weekend Reading:
I enjoyed the first episode of Rob Carrick’s and Roma Luciw’s new podcast called Stress Test. This one looks at how to survive the gig economy.
Erica Alini explains why more seniors are expected to turn to reverse mortgages due to COVID-19.
Jason Heath shares four key things to consider before taking an early retirement package.
Here’s why the bank of mom and dad will need to step in as millennials struggle during the pandemic.
Millionaire Teacher Andrew Hallam smartly explains why emerging market ETFs are a great deal now.
A shocking stat from the Better Dwelling blog shows that the Canadian personal HELOC growth rate nearly tripled in a month.
“Canadians are tapping their home equity very rapidly, and at a time it could be dangerous for them. At the start of the pandemic, the annual growth rate doubled, and nearly tripled for personal use. Considering the abrupt nature of a pandemic, it’s expected to see homeowners tap home equity. That’s what it’s there for. That doesn’t change that higher debt levels make households more vulnerable to shock.”
Trevor Tombe explains why Canada might need a temporary COVID-19 tax and repayment fund.
Wondering what it’s like to fly during the pandemic? The Prince of Travel shows what it’s like in the “new normal”:
My Own Advisor Mark Seed asks an insurance expert whether he should renew his expiring term life insurance policy.
Of Dollars and Data blogger Nick Maggiulli explores the depth of privilege:
“But privilege goes beyond growing up with wealth or having more opportunities than others. Privilege is in the color of your skin, the community you grew up in, and so much more.”
Dale Roberts from Cut the Crap Investing looks at changes made to the TSX 60 Index to explain why index investing works.
Financial advisor Jason Pereira takes a critical look at the self-directed investing platform Questrade and some of its misleading advertising claims.
This Forbes article takes a look at finding your retirement paradise.
Tim Hortons is logging detailed location data of customers through its app — and many may not realize it’s happening at all.
Finally, an investigation into the death of a cryptocurrency founder revealed a Ponzi scheme that cost investors $169 million.
Enjoy the rest of your weekend, everyone!