Instead I’m making a career shift that involves more editing and less writing, one I expect and hope will carry me over a good chunk of my sixties.  It still involves personal finance, a field that has greatly expanded since I took over the FP’s Personal Finance column from the meticulous Bruce Cohen in 1996.

Long before I joined the then-standalone Financial Post in 1993, I was a faithful subscriber and reader. I had been out of journalism for several years and when I decided to return to the business at age 40, reasoned I should write for the publication I read faithfully every day. Bruce’s column was a must-read, as was those of colleagues Diane Francis, Barry Critchley and Sonita Horvich. (Terry Corcoran hadn’t yet joined us at that point).

They ran Bruce’s column three times a week. This was before the web had transformed the media landscape. I recall Bruce staunchly declaring it was “impossible” to do more than three PF columns a week. That was true for him because of the way he approached the task: he went into considerable depth and took pains to ensure every fact was accurate [the key to this beat.] I got to know him sitting directly across from his desk when I was the mutual funds reporter.

Newspapers like to “twin” beat writers as a sort of insurance policy for editorial continuity. Sure enough, Bruce did “retire,” not before generously sharing his contacts with me and insisting I take over his column. In recent years, Family Man columnist Garry Marr has sat across from me: we’ve developed a good working relationship that includes the “Boomer/Junior” column in FP Magazine. I’m happy to pass the torch to Garry.

Personal Finance now mainstream in the media

In Bruce’s time, Personal Finance was nowhere as near as mainstream as it is now. At the time, Canada’s other national newspaper didn’t even have a PF columnist. Today, it has at least three I can think of, defining it broadly. At the Post, counting outside writers there must be half a dozen: either in the paper or feeding the ever-voracious web under the watchful eyes of Personal Finance editor Suzanne Steel.

Worldwide, there are thousands of personal finance blogs, discussion forums, newsletters and social media financial pundits, many of which are on my Twitter lists. The web sites of most major newspapers include sections devoted to personal finance, it’s a staple on financial television shows and there’s a veritable torrent of books on the subject.

The challenge is absorbing it all in a meaningful way, which requires distinguishing between mere data, useful information and actionable knowledge: sorting the wheat from the chaff. This is as much an editing as a writing function, which is one of my rationalizations for making this career change.

Whatever happened to retirement?

So whatever happened to retirement? It’s ironic this avalanche of information is ostensibly in aid of helping readers “retire,” as if the working world were some sort of disease that had to be cured. Retirement has long been the raison d’etre of most of the world’s banks, brokerage firms, mutual fund companies and insurance firms.

But increasingly, retirement is like the proverbial mirage in a desert, forever fading into the distance the closer you approach it. For Baby Boomers in particular — to whom the Wealthy Boomer blog catered — retirement looks more and more like a chimera. The government’s hopes to push back the retirement age from 65 to 67 is more evidence of that.

That’s one reason I wrote a financial novel that distinguishes between retirement and financial independence. Using the principles in the book, my wife and I have achieved financial independence but are not yet retiring, though some childless contemporaries have. We’ve chosen to continue to work but as in the novel, do so because we want to, not because we have to.

While this may be the outcome for many fellow Baby Boomers, I caution that the option of working well into one’s sixties or seventies should not become an excuse NOT to save for retirement. First, there’s no guarantee employers will always wish to avail themselves of your services. Second, at some point, either the body or the mind will no longer permit full-time employment.

To all my readers, sources, colleagues and competitors, thank you.

Postscript: “You have delighted us long enough.”

I can’t resist adding a postscript for readers of the blog only.

The column above is virtually what is appearing in the newspaper on March 24 but for this blog, which has always had a slightly different slant, I wish to append a few more thoughts. This despite Suzanne’s witty suggestion that “you have delighted us long enough.” (Fans of Pride & Prejudice will surely pick up on that literary reference.)

For those who are interested in the financial aspects of the Baby Boom generation, my Twitter account contains a list of roughly 500 Tweeters in North America who focus on baby boomers. It’s called The Wealthy Boomer list.  You can find another 500 financial sources of information on my Findependence Day list and I maintain several other lists focused on various aspects of personal finance and economics.

In the meantime, I may blog once or twice a week on my personal web site: www.findependenceday.com. I’ll continue to be active on Twitter and three other social media platforms: Facebook, Linked In and Google Plus.

Some may find the recently published National Post e-book of some of my 2011 columns of interest, entitled The Best of Jonathan Chevreau.

You can also follow FP Personal Finance on Twitter @FPpersonal_fin, on Facebook at facebook.com/FPPersonalFinance, Garry Marr’s Twitter feed @DustyWallet and email Suzanne Steel at susteel@nationalpost.com.

And now I fear I have indeed delighted us long enough. Thank you, goodbye for now and see you on the other side.

– 59 –

But the financial planner, like myself, has no intention of living that frugally. He plans to spend $70,000 a year in retirement. He then proceeds to articulate his own definition of retirement, which pretty much jibes with my own concept of Financial Independence, articulated in Findependence Day:

I don’t expect to stop working ever. On the other hand, what I really want to get rid of is the “obligation to work.” At 28, I started to work 4 days a week and this is only the beginning. I don’t want to be forced to work or have to be there from 9 to 5.  Therefore, my definition of retiring is being able to do what I want to do when I want to do it. This is closer to financial independence than retirement. If I could work 20 hours a week and still live the same lifestyle, I think I would retire today!

Early retirement “affordable for anyone.”

He concludes early retirement is “affordable for anyone,” as long as you start saving early and maximize your retirement savings accounts. It also helps to land a job with a big company early in life and enroll in their Defined Benefit plan. Retiring before 45 will require “extreme sacrifice,” he says but he views early retirement at 55 as “definitely feasible.”

Also on Twitter Friday morning was a related blog item on the BrighterLife.ca web site by Dave Dineen, who has been chronicling his “retirement” since late 2010. As he relates here, every day of his retirement has been a happy one but it may not be quite the vision of it those still working may harbour. He describes it as a series of “stops” and “starts.”

– 59 –

BMOLaura Parsons

I wholeheartedly agree with the stance on debt in retirement taken by the BMO Retirement Institute today. BMO has issued a release saying debt is the number one barrier preventing Canadians from saving for retirement and that their priority should be to retire free of debt, including a home mortgage.

While a BMO survey of 1,500 adults found almost half of those in their fifties have mortgage debt, debt in retirement can be a threat to financial security, according to BMO Retirement Institute head Tina Di Vito. “Many retirees have fixed incomes and could find it very difficult to meet their mortgage obligations, especially in the event of sudden increases in interest rates or unexpected expenses.”

A paid-up home is the foundation of financial independence

I’ve long stated in blogs, columns and books that there’s little point trying to retire if one is still encumbered by debt, whether of credit cards, lines of credit or even the home mortgage. As one character says in my financial love story,  (see below), “the foundation of financial independence is a paid-for home.”

BMO mortgage expert Laura Parsons outlines various options for homeowners who wish to become mortgage free sooner. The key strategy is to choose a shorter amortization period, which will dramatically reduce the total interest expense of a mortgage and thus the amount of time you have to make mortgage payments.

Parsons says that if you’re paying 5% interest on a mortgage of $400,000, just by moving from a 30-year amortization to a 25-year one can save $70,000 in interest over the life of the mortgage. The savings can be redirected to building your retirement wealth — far better to be the recipient of interest income (or dividends) than the payer of it!

– 59 –

Jonathan’s financial novel, Findependence Day,  is available at www.findependenceday.com.

“Tax cheats” must not gain “unfair advantage”

Late this afternoon, I received two communiques to my queries posed Thursday. One was the following short statement from a spokesperson for National Revenue Minister Gail Shea:

Our government built on our aggressive tax relief by introducing the landmark TFSA, the most important personal savings vehicle since the RRSP.  Nearly 7 million Canadians have taken advantage of this new option. The vast majority are in compliance with the law, and the overwhelming majority of Canadians will not be affected.

However, as with all investment vehicles, CRA has a responsibility to protect the tax base and ensure tax cheats do not gain an unfair advantage. Our Government’s expectation is that CRA aggressively pursue cases where individuals have taken part in schemes that violate the Income Tax Act.

A second longer email included the answers, or sort of answers. to the four questions I had posed:

On October 16, 2009, the Minister of Finance proposed amendments to the legislation to address concerns that arose at the time regarding the use of Tax-Free Savings Accounts in tax-planning schemes. The proposed amendments were enacted effective October 17, 2009.  CRA routinely conducts risk assessment and compliance activities of TFSAs to ensure compliance with the Income Tax Act.

Any potential audit would consist of a review of the transactions that took place within a TFSA. These transactions may, for example, be identified as being swap transactions, and as such, may be liable to a special tax referred to as a tax on advantage. The tax on advantage is intended to prevent transactions designed to artificially shift taxable income away from the holder of the TFSA and into the shelter of the TFSA or to circumvent the TFSA contribution limits.

Please refer to point 6 below for more information concerning the special taxes related to TFSAs.

In regard to your other queries:

1.       How large does a TFSA attract the CRA’s notice, and triggers a request for a questionnaire? (I’m told some TFSAs under attack are north of $100,000).

The CRA applied risk assessing factors to the entire TFSA population, and those with the highest level of risk were subject to an audit.

2.       Were these loopholes addressed on Oct 17, 2009 when the government prohibited the kind of swap transactions that make such huge rises in TFSAs possible?

On October 16, 2009, the Minister of Finance proposed amendments to the legislation to address concerns that arose at the time regarding the use of TFSAs in tax-planning schemes. The proposed amendments were enacted effective October 17, 2009.  The CRA routinely conducts risk assessment and compliance activities of TFSAs to ensure compliance with the Income Tax Act.

3.       How many questionnaires have been sent out?  How many audits proceeding?

Every TFSA that is considered to have a high risk factor may be subject to compliance activities.  The vast majority of TFSA holders are compliant with the law, and only those who have pursued aggressive tax planning schemes are likely to be subject to further activities.

4.       What are the penalties if prosecuted?

Unless a taxpayer is charged with a criminal offence, there are no prosecutions involved.

The audits underway are civil audits of TFSAs that may result in the assessment of a special tax related to TFSAs.

The following taxes may be applicable to a holder of a TFSA:

i)         Tax payable on excess TFSA amount – taxpayers may contribute $5,000 into a TFSA each calendar year starting in 2009. Any outstanding contribution room is carried over to the subsequent year. If a taxpayer contributes more than the limit for the year, they are subject to a tax of 1% of the excess amount contributed.
ii)       Tax payable on non-resident contributions – if a non-resident makes a contribution, they are subject to a tax of 1% of the contribution.
iii)      Tax payable on prohibited or non-qualified investment – if a taxpayer invests in a property that is deemed to be prohibited (eg. the taxpayer invested in shares of a corporation that he owned at least 10% of) or non-qualified (it does not meet the definition of a qualified investment), they are subject to a tax of 50% of the value of that property when it became a prohibited or non-qualified investment. This tax may be refundable if the taxpayer disposes of the property in question.
iv)      Tax payable in respect of advantage – a taxpayer may be subject to a tax of 100% of the value of:
a.       Any benefit, loan or indebtedness that is conditional on the existence of the TFSA, with certain exceptions;
b.      A benefit that is an increase in the fair market value of property held in connection with a TFSA where it is reasonable to conclude that the increased value is attributable to certain events or circumstances, including swap transactions; and
c.       Income that is attributable to an over-contribution or to a prohibited investment.

– 64 –

More than one in three Canadians (36%) feels their financial position has weakened due to costs outpacing incomes, says the study of 18,000 people by Dutch research firm TNS NIPO.

Almost everywhere, respondents said they are saving less because of the economic situation: 47% of Canadians and 48% of Americans are saving less. Across the board, “people’s saving behaviour has changed significantly following the global financial crisis,” says ING senior economist Ian Bright.

Chronically low interest rates have also had a considerable impact on savings rates. In Canada, 32% are comfortable with their regular spending levels: they feel they can pay their bills and have some money left to save but they need to budget for special items. But 27% don’t have much left over after paying their monthly bills. In the U.S. 20% feel comfortable with their spending and feel they have enough left after the bills to have some fun and to save.

Canadians more trusting of banks and financial institutions

Compared to citizens of other countries, Canadians are among the most trusting of banks and other financial institutions: 39% trust them versus only 17% of Americans when asked whether they trust banks to help them make a major financial decision. That compares to 58% of Canadians who trust their family the most in making a major financial decision, and 65% of Americans.

Housing accounts for the top monthly expenditure for 50% of Canadians, with food second at 31%, utility bills at 8% and transportation at 6%. (For some reason, the single biggest expense of taxation doesn’t seem to have been factored into the survey results).

For Americans, housing is ranked top by 54%, with 23% listing food sa their top monthly expense. In emergencies like unforeseen home or car repairs, 32% of Canadians can readily access more than $2,000, versus 38% of Americans.

– 64 –

Learning Money with Leo can be downloaded free from the iTunes app store or the RBC Advice Centre here.

RBC’s research shows that children are becoming tech savvy at younger and younger ages: 52% of kids under 8 have access to mobile devices like iPads or video iPods and 46% of children aged 5 to 8 use a computer at least once a week.

Teach the value of earning and saving

RBCLearning Money with Leo app

One of the interactive games on the app helps children recognize coins of various denominations and earn reward coins in return through games like Gather the Coins, Spot the Differences and Sort the Coins. A read-along story book teaches them the value of earning and saving and a sticker book and store lets them earn reward coins by playing the games.

At this age, children are in their prime learning years and can absorb such concepts as the value of money, what it means to earn money and the benefits of saving, says RBC senior vice president Jane Broderick.

RBC has also introduced a Financial Advice for Families section at its RBC Advice Centre. It includes financial advice for new or expecting parents, money management and budget-setting tips and other advice on teaching children about the concepts of earning, spending and saving money.

– 64 –

The participation rate is down slightly from 39% last year and unchanged from  38% two years ago. The average contribution was $4,670, up slightly from $4,538. But the average was highest in British Columbia, where it reached $6,703.

ETFs still much less popular than mutual funds or even GICs

Despite all the media attention lavished on exchange-traded funds the past year (mea culpa!), 59% of the 1,500 investors polled by Leger Marketing preferred to invest their RRSPs in mutual funds: versus just 6% for ETFs.

ETFs weren’t even a close second: GICs were the runnerup at 25%, followed by individual stocks at 22% and individual bonds at 12%.

Over at CIBC, February was a record month for mutual fund sales, says spokesman Kevin Dove.  “We saw an increase in new deposits to guaranteed RRSP investments compared to 2011, however there was also a trend towards funds moving from guaranteed investments into mutual funds.”

None of this shocks mutual fund analysts.

“I’m not overly surprised mutual funds are still the most popular choice,” says Oakville, Ont.-based fund analyst Dave Paterson, “The vast majority of people who would have or were planning to contribute to an RRSP this year were working with an advisor or their bank. Most advisors and banks sell mutual funds, so that would be the most popular option.”

If GICs runnerups at today’s low rates, they’ll always be around

That also explains why GICs  were second. “I suspect that among those who consider themselves to be ‘do it yourself’ investors, the proportion who invested in ETFs would be much higher,” Paterson said.

Dan Hallett, director of asset management for HighView Asset Management says GICs have been around  a long time, are easy to understand and are a safe investment that appeal to investors burned by years of  volatile markets. “So if GICs are still popular at today’s low rates then they’ll likely always hold a place in the portfolios of many.”

Similarly mutual funds have been the vehicle of choice over the last two decades and are more “familiar” and convenient to Canadian investors than ETFs, Hallett said.

Even some seasoned do-it-yourself investors accustomed to buying investment funds or individual stocks at discount brokerages may find ETFs intimidating, Hallett says.

Dan HallettDan Hallett

They trade like stocks so the mechanics are different than what they’re used to with mutual funds.  And that will make them less likely to make the move to incorporate ETFs into their portfolios — or defer this kind of change. Plus, it’s just a newer class of investment for DIY investors.  But that will change with time.  As the ETF product universe grows and matures, it will draw more dollars both from DIY investors directly and from advisors buying ETFs for clients.

Lack of funds still main excuse for not contributing to RRSPs

As for those who chose “none of the above,” (i.e. didn’t contribute at all to their RRSPs), 61% cited a lack of funds as their reason.  14% of the non contributors said they already had enough money for retirement, 9% lack confidence in the economy and — this one cracks me up — 4% “did not think it was important to make a contribution.”

– 64 –

Normally, when February has only 28 days, the RRSP deadline is March 1st but in 2012, March 1st will be too late. That means the deadline is tonight a minute before midnight, at least if you do online banking or have an online discount brokerage account. For example, BMO says cash contributions can be made until 11:59 pm at bmoinvestorline.com. You can also contribute by phone by dialling 1-800-665-7700.

If you normally like to contribute in person at a bank branch or the retail presence of other financial institutions, I’d try to do so before 5 pm. Most TD Canada Trust branches will be open till 6 pm, a spokesperson said.

While some financial institutions will bend over backwards today and stay open till 8 pm or later, you can’t count on that. In any case should check their web sites before venturing there in person.

Keep in mind that at this point, the name of the game is simply to contribute the money in time to generate an RRSP receipt that can be used when filing your taxes due April 30, 2012. It’s not necessary to make an investment decision by the deadline — you can contribute in cash or “park” it in a money market mutual fund or short-term savings accounts.

How to contribute when you lack the cash

If you have non-registered investments, you can also contribute securities “in kind,” in effect transferring stocks or investment funds to your RRSP. This may incur capital gains since the Canada Revenue Agency will consider the transaction a “deemed disposition” (i.e. sold at today’s market value). Ideally, you identify securities that are trading roughly at the level you bought them at.

The other way to contribute when you lack the cash is to borrow, either getting an RRSP top-up loan to maximize your contribution, or if you have years of undercontributions, a larger RRSP “catch-up” loan. Because this is a more complex transaction, it would be futile to try to do this just before midnight.

– 64 –

A flurry of surveys have been released this week to mark Fraud Awareness Month. One from CanadaHelps.org and Capital One Canada finds 45% of millennials aged 18 to 34 do no due diligence before donating to charity and 52% are spontaneous “on the fly” donors. Both traits put them at risk for fraud.

The survey of 1,0 found millennials more than twice as likely as other demographic cohorts to fork over per information. They’re half as likely to ask whether a charity is registered or to ask for a solicitor’s identification. Yet only 19% of millennials are overly concerned about being defrauded — compared to 27% for other generations.

Door-to-door solicitations are giving way to online appeals. While telephone still accounts for 20% of charitable appeals, email is close with 17%, as is social media also at 17%. More than a third don’t trust the security of online donations. While 90% trust online banking and 84% trust online retail purchases, only 65% trust online donating.

You can find an online Charity Fraud Awareness Quiz here.

Visa Canada: all generations have bad online habits

On Monday, Visa Canada also released a survey which found Canadians of all ages have bad habits when it comes to protecting themselves against financial fraud. Like Capital One, it found seniors more suspicious than young people about sharing personal information online.

It found those aged 18-30 were most likely to share personal information online (32%), versus 24% of those aged 31-45, 14% of baby boomers (aged 46-65), and 9% of seniors (66 and older) who engaging in similarly risky behaviour:

Young Canadians are the most likely to overshare personal information on social media sites, including their email address, home address, birthday, or phone number – information that could be used fraudulently for identity theft and other scams. They are also most likely to share their credit card information and PIN (Personal Identification Number) with someone.

Visa is holding a free seminar on March 1st in Toronto for about how seniors can protect themselves. Details here.

TD: Citizens more vigilant about traditional debit card fraud and identity theft

TD Canada Trust has also released a survey on this topic. It finds 84% of Canadians are worried about online fraud, 77% fret about malicious social media apps, 72% worry about phishing and 61%  fraudulent cell phone apps.

They also continue to be concerned about more traditional forms of fraud: 87% worry about debit card fraud (down from 81% in 2011) and 91% worry about identity theft (down from 86%) but more people are taking precautions to protect themselves.

For more details and to take a fraud prevention quiz, click here.

– 61 –

As host Bill Crystal quipped, Hollywood’s biggest event is all about “millionaires giving golden statues to each other.”

But for every Meryl Streep and Cameron Diaz are many lesser-known actors whose time in the sun may prove to be relatively brief. Like star athletes, the careers of entertainers below the top echelon can be brief. For every fabulously wealthy megastar are lesser celestial bodies who earn decent money for a few years but will be challenged to make it last a life time.

Megastars may accumulate $10-million to $500-million in a short time but lesser lights may experience only three to seven years of making big money, says Beverly Hills-based Brett Bartman, financial advisor to the stars. Managing their money is a classic case of making hay while the sun shines.

RBC Wealth ManagementAdvisor to the Stars Brett Bartman

Bartman is with RBC Wealth Management’s SB Wealth Strategies group, which caters to the unique financial needs of entertainers. As a fee-based discretionary money manager, he focuses on investments, farming out functions like tax, real estate or estate planning to specialists.

Hollywood likes non-American banks

How is it that Bartman, an American, does business with a Canadian bank? “Many clients feel comfortable with the fact we’re not an American bank, to be honest,” Bartman says. Since the 2008 crash, it’s been a difficult time for American banks and a common perception in Hollywood is that Canadian banks do a better job.

The departure of firms like Lehman Brothers and Bear Stearns has allowed RBC to make “tremendous inroads” in a crowded field.  “The brand is just developing, especially out here in Los Angeles.”

To get a foothold, the Royal Bank of Canada acquired Dain Rauscher in 2000. Two years later, it merged with a long-established West Coast investment bank called Tucker Anthony Sutro. In 2008, RBC Dain Rauscher was renamed RBC Wealth Management.

What Bartman tells his celebrity clients (including talent behind the cameras) is the same as what he tells mere mortals: live within your means. “They need to understand the likelihood of this level of income lasting is small.”

Clients urged to save at twice the rate as mere mortals

He urges them to save twice as much as the rest of us. So if ordinary folk should save 15 to 30% of their modest incomes, Bartman tells his celebrity clients to save 30 to 60% of their much larger incomes for as long as they last. They also have huge expenses, buying luxury cars and multiple homes in a short time. “We need to emphasize savings as well.”

Because of their short careers, their money is invested like ordinary people would in their senior years: the focus is capital preservation, with more weight in fixed income than stocks.

Entertainers are in effect cultural entrepreneurs, so their careers are their equity exposure. As they convert human capital into financial capital, it makes sense to direct much of their investments into fixed income. Bonds may not generate much interest income but it may not be necessary to go far out on the risk/reward curve — a small return on a large portfolio may suffice.

The asset mix may be the inverse of what ordinary people would have. While an everyday 30-year-old might be counselled to hold 70% stocks to 30% fixed income, a celebrity of the same age might be the other way round.

Because of extreme volatility of the past decade, many young stars are afraid of stocks.  If their desire to minimize risk is too extreme Bartman reminds them portfolios entirely in cash and bonds have risks of their own: of inflation and rising interest rates that can inflict capital losses.

BMO Financial GroupLaura Parsons

Asked what they regret most about their retirement plans, 42% of Canadian baby boomers say they wish they had started saving up for it much earlier in life. A BMO survey out today also finds that fully a quarter of 930 boomers (aged 45 or older) polled would if they had the chance to go back in time make regular RRSP contributions to the limit of their permitted room. A similar 24% wished they had put more thought into what their retirement would look like and budget properly for it.

Cash & real estate get nod over stocks

However, when Leger Marketing asked how they would invest those RRSPs, stocks didn’t appear to make the wish list. Instead, 35% said they wish they had invested in more real estate, 31% would have invested more in GICs and 20% in cash.

Asked what their advice would be to those now in their 20s, 59% of the boomers polled would urge the young to open an RRSP as soon as possible and contribute to it regularly (which I take as every year). Since Tax Free Savings Accounts (TFSAs) have only been in existence since 2009, boomers couldn’t regret not having contributed to them in their own youth but 53% do suggest young people should open a TFSA and maximize it (currently to $5,000 a year). 45% suggest a priority should be to pay down the mortgage faster.

I wouldn’t argue with any of this advice. BMO Mortgage expert Laura Parsons says it’s essential to avoid carrying mortgage debt into retirement and the best way to do that is to choose an amortization period no more than 25 years. Personally, I’d go further and suggest no more than 10 or 15 years since the interest savings can be pumped into additional TFSA and RRSP contributions.

– 62 –

carp.ca

Judging by the muted remarks about Old Age Security made by Minister of Human Resources Diane Finley Tuesday, the Conservative government is starting to tread very carefully about phasing in changes to the OAS program.

As colleague Scott Stinson reported here this afternoon, Finley said little that hasn’t been said before but emphasized that “today’s seniors will not be affected.”

National PostHuman Resources Minister Diane Finley

The thrust of the talk to the Canadian Club in Toronto was that long-documented demographic pressures (falling fertility and aging population) are putting pressure on the retirement system. But now we have the minister’s personal assurance there will be no changes for seniors already collecting OAS (and thus the GIS). She added there won’t be any impacts for anyone “close to retirement,” although it’s not yet clear how close “close” is.

Is 57 “close” to retirement?

I was out of the country last week when the latest round of OAS blowback occurred but was informed by a concerned friend that “close” to retirement means being older than 57, based on various media reports. As Morneau Shepell chief actuary Fred Vettese wrote in our Saturday paper — here — with respect to raising OAS eligibility to 67,  “We have already been assured it won’t happen at least until 2020, so it will not affect Canadians over 57.”

We won’t know for sure until next month’s federal budget but odds are anyone still in their 50s will at worst experience only a slight impact if OAS is  gradually hiked from age 65 to age 67. Given the huge number of votes already retired seniors command, not to mention million of baby boomers on the cusp of retirement, I can’t imagine the Tories would dare to radically change the rules in mid-stream for either cohort. Younger people 45 and below are a different story but they still have plenty of time to prepare for what will be likely a phased-in rise in OAS eligibility.

As Parliamentary Budget Officer Kevin Page said before CTV’s Question Period on February 12th, the government has known about the old age demographic for decades. The week before his office released a report that suggested Ottawa can afford to enhance senior benefits, despite the Prime Minister’s contention that the current model is unsustainable. Page said it was a “bit disingenuous” to put the blame for a looming fiscal crisis on the rise in OAS recipients.

Of course, the Conservatives are free to float such a proposal in the hope it will be greeted with shrugs of indifference. But that was never going to happen. Predictably, CARP (which represents both seniors and boomers 45 plus) has responded with its “Hands off OAS” campaign, which you can find here.

carp.caSusan Eng

CARP vice president of advocacy Susan Eng says OAS is responsible for only 2% of the nation’s GDP and the government could find bigger savings in health care. Besides, “If they get pension reform right, people don’t have to even care about OAS.” That said, CARP’s members are “raging mad” because such a basic attack on the social safety net was never mentioned in last spring’s federal election campaign.  70% of CARP’s members are already retired and presumably not directly impacted by the planned OAS changes.

Eng says CARP was disappointed by the lack of substance in Finley’s luncheon speech Tuesday:

We poll our members regularly and in this case, their opinion is that making this change unilaterally will affect their votes. Over 4,000
members voiced their opinion on the poll that we issued last Friday … If the government is bound and determined to make this change, then there should be a full public review of all the facts and evidence with all the stakeholders at the table.

Echoes of “Hands off our RRSPs” campaigns past

This campaign reminds me of a long-ago trial balloon to tax RRSPs, which resulted in a similarly named “Hands off our RRSPs” campaign. The RRSP tax never happened, although RRSPs are ultimately taxed anyway when they become Registered Retirement Income Funds (RRIFs). And of course if RRSPs and RRIFs become big enough, they will result in a clawback of OAS benefits. I still wouldn’t rule out a sneakier adjustment of clawback rules for the semi-affluent rather than an across-the-board hike in the OAS eligibility age.

Morneau ShepellFred Vettese

Actuary Vettese notes that the OAS proposal “is actually the second move the government has taken along this path.  The first was to reduce early retirement pensions under the Canada Pension plan while increasing pensions for those who postpone their start date until past 65. As a next step, it will be interesting to see if the government takes steps to reduce the early retirement incentives within the federal public sector pension plans.”

Interesting but not likely. When it comes to pensions and retirement, Ottawa’s stance will probably be the Orwellian “all animals are equal but some animals are more equal than others.”

A third was Pat Foran’s The Smart Savvy Young Consumer, released in October. The veteran CTV broadcaster and consumer advocate got to know Jacks while both served on the federal government’s Financial Literacy Task Force. The pair decided the market was ready for a primer aimed at the young and have been rewarded with a bestseller in a scant six weeks time (by which I presume means 5,000 copies).

At the event in Toronto, where all four books were provided to attendees (along with order forms for multiple copies; “Books don’t sell themselves,” Jacks reminded the audience), Foran said he found the actual buyers of the books are primarily parents and grandparents. I mentioned the book when it came out and happily do so here again.

Financial Recovery in a Fragile World

The newest of the four books is an excellent collaboration called Financial Recovery in a Fragile World, coauthored by Jacks, financial journalist Al Emid and Robert Ironside. I’d read the book cover to cover several weeks before publication, in order to furnish it with a back cover testimonial. Here’s what I said:

An essential financial survival guide for Canadians blindsided by the global financial crisis. We can’t control Eurogeddon or an insolvent Uncle Sam but we can get our personal financial house in order –starting with what governments have failed to do: paying down debt and maximizing after-tax cash flow.

The book’s certainly worth reading because it tries to tie all these worrying global macroeconomic developments into a cohesive investment strategy for the average bewildered Canadian investor. I had meant to revisit the book for this blog but ended up getting sidetracked by one of the other four books.

Master Your Retirement, 2012 edition

Financial planner Douglas Nelson originally published Master Your Retirement in 2008. I can sympathesize with the unfortunate timing of releasing it in the year of the great stock market crash because of course the same thing happened to me: Findependence Day came out in November 2008.

There are are a lot of books on retirement out there and while I noted Nelson’s book with interest at the time, I never did get around to reading it. That is, I didn’t until I started flipping through the new revised 2012 edition. I soon stopped flipping and started reading it with my full attention, from start to finish.

For starters, the cover is a lot more colorful. The first edition was a simpler blue and white textual treatment although both versions run the same subtitle: How to fulfill your dreams with peace of mind.

Any baby boomer reading this blog and thinking about retirement some time in the next 10 or 15 years will find this book well worth reading and perhaps underlining for continued reference. As you’d expect, given the association with Jacks, tax plays a major role. In fact, as Nelson mentions more than once, tax is the single biggest expense Canadians have to deal with: certainly while they’re working but equally so when they’re retired or semi-retired.

But there are two other great killers of wealth that near-retirees must consider: one is the high cost of investment management fees (a theme that’s no stranger to this blog!). The third biggie is inflation. On top of that there is also debt and compound interest charges and market volatility.

Nelson — who has a B. Comm., CFP, CLU, MFA and CIM — suggests that retirees make sure that no more than 30% of their income come from an investment portfolio. That therefore means diversifying income among employer and government pensions, annuities, insurance and certain types of guaranteed investments.

The 5 phases of Retirement

The book is especially useful in its presentation of the five phases of retirement. Phase 1 is probably where a lot of the readers of this blog are: the 7 to ten years preceding retirement. Phase 2 is the critical first two years of actual retirement, a tenuous time that finance professor Moshe Milevsky has described as being the Retirement Risk Zone. (he calls this the five years before and after retirement). Nelson gets across the sobering thought that a couple’s net worth is likely to be at its life-time peak at the moment of retirement — after that, withdrawals, inflation, market impacts and even excess longevity can make for a scary 20 or 30 years if you’re not properly prepared for it.

These first two years are a sort of “provisional” or “phased” retirement: some may scurry back to the work world. But for those who settle in comes Phase 3 or the Active Years, which financial services companies love to depict in their marketing materials: world travel, volunteering, happy outings with the grandkids and so on.

But of course, whether they last 2 years or 20, at some point the happy active years of retirement come to a close. Sooner or later, Phase 4 arrives and illness strikes. Since Nelson is also a Chartered Life Underwriter, he has some interesting recommendations on life insurance, critical illness insurance, long-term care insurance and other forms of protection.

Finally, Phase 5 is the death of one partner. One partner is alone again and Nelson deals with estate planning and readying the estate so that the children and other beneficiaries can make a smooth transition of assets after the death of the second parent. And as in the working years and the happy active days of retirement, the topic of taxation is never far away.

All in all, the $19.95 price tag of the book is nothing compared to the value of the insights and the information. There’s plenty of good stuff on OAS, CPP, age and pension credits and similar topics.

Essential Tax Facts 2012

Oh, and the fourth book? I’m away this week down south and blush to say I didn’t pack the tax guide with me. That pleasure awaits my return and the annual tax preparation ritual that awaits us all. We’ll look at the book in detail once we are ready. In the meantime, there’s no one in the country who knows tax like Jacks. To a greater or lesser degree, the theme of tax runs through all these books in Jacks’ burgeoning publishing empire.

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One in four (26%) Canadian couples don’t even know what a spousal RRSP is and only 27% actually use them. A spousal RRSP is a tax-effective way to split your taxable income with your spouse during retirement, says BMO Retirement Institute head Tina Di Vito. For more about them, click here.

Preparing for retirement more stressful than Valentine’s

Valentine’s Day doesn’t come round till next Tuesday but the event stresses men out (30% of them) more than women (10%), the Leger Marketing poll finds. By contrast, the idea of dealing with retirement stresses out 61% of women, compared to only 51% of men. Across both sexes, 56% find the topic of saving for retirement stressful, versus only 20% who think Valentine’s Day is stressful.

According to the poll, a majority of couples don’t talk about some major financial events. Only 47% have discussed what the ideal retirement lifestyle would look like while only 46% have talked about what age they want to retire at or where they would live in retirement (44%). Only 42% have discussed how much money they’ll need for the ideal retirement lifestyle and only 36% have decided if they’ll be staying in their current home or selling it.  Only 30% know how much their spouse has saved up in their RRSP.

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Across Canada, 40% of the 1,032 polled by Angus Reid Forum early in February describe themselves as opportunistic, risk-taking or analytical, all of which typically suggest buying behaviour. The number of self-described “opportunistic” investors has risen by 75%  since July 2011. These are the most bullish results since Templeton began tracking investor sentiment after the global financial crisis three years ago.  “It’s the biggest change in investor sentiment in three years,” said Don Reed, president and chief executive officer of Franklin Templeton.

However, 42% of investors are still in the two risk-averse camps: 27% are “suspicious” about the markets and 15% are downright timid. Those who are “not sure” have dropped from 30% in June 2011 to 17% now, a fact Templeton interprets as “sentiment is hardening.”

2012 will be a tug of war between bulls and bears

30% are “not making new investments” while an equal percentage feel they have a good strategy they plan to stick with. Reed expects a tug of war between bulls and bears this year which in his view makes it “a perfect time for investors to get off the sidelines and re-enter the equity markets.”

In an interview, Reed said he’s optimistic and bullish personally, and remains close to 100% invested in equities, chiefly through his firm’s various mutual funds. He’s been adding personally to Asia-ex-Japan equities via a Mark Mobius-managed Templeton Fund, to Leslie Lundquist’s Bissett Canadian High Dividend Fund, and to U.S. and global funds in the Mutual family.

While many talking heads were bearish in December, Reed says the so-called January Effect says if the first five days of the new year are positive and the month is also strong, then the odds are the entire year will be a positive one for the markets. [For another view on the January effect, from Mark Hulbert, click here.]

“After coming through a strong January, with markets up 4% or more around the world, when we talk to people they’re seeing markets getting stronger and they’re feeling better about the economy.”

Investors often forget that through every cycle up and down, the stock market usually leads the economy. “Given the expectation that Europe will clean up its act by the end of the first quarter and into the second quarter, all will be quite comfortable, with the economy reacting positively in six to 12 months. Once everyone is comfortable with a positive move in some of those macroeconomic elements, we’ll start to see stock prices move.”

Reed credits federal reserve chairman Ben Bernanke’s stance on interest rates for rekindling investor enthusiasm. Now that he’s reassured the market that rates won’t rise until 2014, “he’s sending a clear signal that if you want a return on your money you better get out there and do some acquisitions and build inventory. Get back to doing business. All that has made me optimistic.”

Three in four counting on CPP/OAS for retirement

The survey also found almost three quarters (74%) are counting on the government for the Canada Pension Plan and Old Age Security, while almost as many (72%) expect to rely on their RRSPs. 41% also view their home or other property as a potential source of retirement income, a percentage that hits 54% in British Columbia.

While only 10% are most concerned about the inevitable ups and downs of the stock market, 49% say their biggest financial concern is running out of money.

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RBCRBC Financial Planning's Jason Round

There appears to be a generational gap involving planning for financial independence, according to the latest installment of RBC’s 22nd annual RRSP poll, released Tuesday.

The percentage of Canadians with a financial plan is inverted:  60% of young people aged 18 to 34 do NOT have one, versus 59% of older folk aged 55 to 69 who do have one. However, of those who do have a plan, 40% of the younger generation say they have a “Plan in my head,” compared to only 21% of boomers who have such a fuzzy concept of a financial plan.

In other words, a majority of boomers (52%) have an actual written plan on paper, while only 28% of young Canadians have committed to a plan on paper.

While I can sympathize with the notion of a “plan in your head,” it’s hard to dignify such a strategy with the descriptor of “plan.” RBC head of Financial Planning Support Jason Round recommends a written financial plan because it lets you map out progress and take action. A written plan can be shared with an advisor and be revised as goals and circumstances change.

Not worth the paper it’s not printed on

Toronto actuary and blogger Promod Sharma put it best in a comment in Linked In:  “A financial plan in your head isn’t worth the paper it’s not printed on.”

The Ipsos Reid poll of 1,224 conducted in the fall found 82% of young Canadians and 91% of boomers would not welcome the prospect of having their families take care of them in old age if they outlived their savings.  [To draw on my own particular preferred term, RBC notes that "Canadians young and old want financial independence in retirement."]

In addition, 78% of the young and 72% of boomers worry about balancing saving for immediate priorities with putting money aside for the future.

Not surprisingly, the younger cohorts lag boomers in RRSP ownership and contribution levels: 43% of the young have RRSPs versus 69% of boomers. And only 16% of the youngsters are maxing out their RRSP contributions, versus 31% of boomers.

Take it from me: life is short and time seems to accelerate after age 30. Money grows at an impressive rate if you start saving early enough, especially if there’s no tax drag. That’s one of the beauties of RRSPs. Young investors have an advantage the boomers no longer possess: a very long time horizon that is favorable to long-term growth and also smoothes out stock market volatility.

But don’t just have a “plan in your head.” Meet with a professional and commit it to paper.

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The poll of 1,551 Canadian adults (18+) found 320 or 18% currently investing online. Another 16% are considering investing in discount brokerages but have not yet started to do so.

BMO listed several advantages of “Do it Yourself” (DIY) investors holding an RRSP with an online brokerage account. Among them are flexibility, control, and convenience. Curiously absent from its list is the most compelling benefit associated with discount brokerages: lower cost of commissions. When queried about this omission, a bank spokesperson said “Yes, cost savings would be a part of it as well.”

I should say so! The bank doesn’t even use the term “discount brokerage,” preferring the terms online or “self-directed” investing. But it all amounts to the same thing. Whatever they’re called, online or discount brokerage accounts can hold a wide variety of investments. BMO’s list includes mutual funds and exchange traded funds (ETFs), guaranteed investment certificates (GICs) and bonds. And of course, investors can also purchase individual stocks through such accounts. All major online brokerages also include a wealth of educational and research data to help in choosing appropriate investments.

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Try to decide if the following five questions are true or false, but don’t peek at the answers below.

True or false?

1. The odds are I won’t live to 90, so I don’t need to plan for my money to last.

2. The best time to start saving for retirement is when you’re about 40 or when you’re more established financially.

3. You need 75% of your working income to get by in your retirement.

4. The best way to fund your retirement is through the equity in your home.

5. You need to have a lot of money to invest in an RRSP.

You can find the full release here. However, I don’t necessarily agree with TD’s characterization of some of these points as “myths.” For example, TD seems to think it’s a myth that you should focus on eliminating debt before retirement. I happen to think that for most of us, it should be a true statement.

But back to the true/false quiz.

The answers

If you answered “true” for question 3 and “false” for the other four, then give yourself a gold star.

Here are TD’s answers. I’ve repeated the questions for convenience:

1. The odds are I won’t live to 90, so I don’t need to plan for my money to last.

False: The reality is that Canadians are living longer than ever before, many into their nineties. Therefore it’s important to ensure that you have enough savings so you don’t have to worry about outliving your money.

2. The best time to start saving for retirement is when you’re about 40 or when you’re more established financially.

False: While it’s never too late to start saving, it’s best to start as early as possible, ideally when you are finished school and have a full-time job. The sooner you start saving, the more time your money has to grow, and the larger your retirement nest egg will be.

3. You need 75% of your working income to get by in your retirement.

True: Depending on what you plan to do in retirement, and whether or not you have any debt, it’s safe to estimate that you will need 60-80% of your working income to continue to lead the same lifestyle in retirement that you had during your working years.

4. The best way to fund your retirement is through the equity in your home.

False: While relying on the sale of your home is a good way to boost your retirement savings, unless you’re planning to downsize significantly, it likely won’t generate enough money to last throughout your golden years. It’s important to ensure you have additional savings and investments, such as money in an RRSP, TFSA, pension or equities.

5. You need to have a lot of money to invest in an RRSP.

False: Saving a small amount as soon as you start working full time, and increasing the amount you invest as you earn more money, can result in a rather golden nest egg thanks to the power of compound interest and dividends.

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In the report, entitled Perfecting the workplace pension, the quest continues, the institute’s head, Tina Di Vito, says old-time DB pensions provide workers with retirement income that is independent of the performance of financial markets. “Some of the better quality plans can provide a relatively high retirement income: often 60-80% of their annual salary once they reach the 30-40 year range in service years.”

Generally, BMO finds job-seekers are not placing high enough priority on good pensions when evaluating job opportunities. They tend to look first to salary (in 47% of cases) and job flexibility (22%) with only 7% considering a good pension to be the most important factor. In fact, the majority don’t even know what a good workplace pension would look like.

Employers become well-wishing interested bystanders

Of course, the report makes it clear that the inexorable trend is for employers to be offering not DB plans but so-called “Capital Accumulation” plans like Defined Contribution pensions or group RRSPs. These shift investment risk from the shoulders of employers to that of workers. As the report puts it, the role of employers offering Capital Accumulation plans moves from being an Income Guarantor to a “Interested Bystander” who merely collects or sometimes matches contributions from workers, then wishes them well “from the sidelines.”

The trend to employers backing away from DB plans in favor of CAPs (Capital Accumulation Plans) will accelerate now that Ottawa has created its new Pooled Registered Pensions Plans (PRPPs), expected to come into force in 2013.  As BMO notes, PRPPs entail voluntary participation by employers but if they do choose to offer PRPPs, workers will be automatically enrolled with an option to opt out within 60 days.

CAPs, whether DC plans, group RRSPs or PRPPs, all suffer from the drawback that rather than provide guaranteed future income, the ultimate payout will depend on how much the worker has saved and how well they have invested what they did save. Unfortunately, Di Vito says “the average person has a tendency to make less-than-optimal financial and investment decisions.”

That’s why designers of CAPs have tried to create auto-features to nudge or require workers to participate.

2008 Crash revealed shortcomings of CAPs

Photo: Darren Calabrese/National PostBMO's Tina Di Vito

Before the 2008 crash, when markets were doing well, people in CAPs were generally satisfied with their performance, as the bull market engendered a high level of confidence that may in retrospect have turned out to be misplaced. But “in the aftermath of recent market turmoil and historically low interest rates, it is hard to understand the appeal of capital accumulation plans for employees,” Di Vito writes.

The stakes are particularly high for middle-income earners. The truly rich need not worry in any case, while lower-income earners can replace most of the level of incomes they experienced in their working years chiefly through government pensions like CPP/OAS/GIS. As usual it’s the middle class who are caught in the middle and challenged to manage their CAPs adroitly enough to generate sufficient future retirement income.

Unfortunately, Di Vito says, at the end of the day, “how large a nest egg a plan participant can amass depends not only on investment knowledge and skill, but also on pure luck.”

This is the same situation as those with large RRSPs find themselves in: those without employer pensions get more RRSP room to begin with, but they are faced with the same challenges of growing them large enough to generate adequate retirement income.  BMO found that even for those whose employers offer pensions, 38% consider their personal RRSP to be their primary retirement savings vehicle.

The report closes with a succinct quote from BMO Advisory Council on Retirement member Dr. Moshe Milevsky: “You are on your own.”

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In the video, Tiwari describes the changing financial landscape in Canada, with advisors “moving towards a fee-based business model” even as their customers (investors) become more sensitive to the impact of fees on long-term net returns.

Vanguard has already seen this movie before in the U.S., U.K. and Australia.

As I noted in a recent column, Vanguard is quite a bit different than the rest of the pack. In his Capital Ideas client letter, BC based fee-only financial planner Fred Kirby lays out the case for Vanguard, all other things being equal. As Tiwari says in the video, it all flows from parent company The Vanguard Group, Inc. of Valley Forge. Vanguard is ultimately owned by the shareholders of Vanguard’s US mutual funds and ETFs, a unique ownership structure  Tiwari says “helps us to align our interests with those of our investors globally.”

The language may seem similar to what other fund companies pronounce but in the case of Vanguard I believe it to be true. As Kirby notes, Vanguard generally proves to be the lowest-cost provider in any market it serves. “Costs matter, so when given a choice between equivalent investment products offered by major ETF providers, the choice should always favour the lower cost product and Vanguard usually wins hands down.”

In my initial column on the pending acquisition of Claymore Investments by BlackRock Canada (maker of the dominant iShares), I suggested Canada’s two dominant ETF providers had gotten together primarily to fend off the incursions from Vanguard. Once the merger happens, the top 16 billion-dollar ETFs will all be from what I have dubbed ClayShares. I did confess my first reaction to the announcement at a personal level was disappointment: less choice potentially, and possibly less innovation. Of course, this was strictly from the vantage point of a customer and investor.

Spreading the wealth will benefit end consumers

Personally, I own or have owned ETFs from all these companies, as well as BMO and Horizons. With just seven or eight local players in the ETF space, there’s room for all of them and a case can be made for most of them making up at least a portion of the average investor’s portfolio.

BMO is good for equal-weighting and currency-hedged foreign ETFs. Claymore has some innovative foreign sector funds that often hedge back to the loonie and it offers the RAFI-based fundamental indexing funds on top of the traditional market-cap weighted ETFs that are the bread and butter of both iShares and Vanguard.

Powershares Canada provides another take on rule-based “intelligent” indexing. Horizons has leveraged and inverse ETFs that let you make bullish or bearish bets on particular segments of the economy and it also offers its actively managed “AlphaPro” ETFs. First Asset’s XTF Capital is also in the active space. And RBC ETFs so far has restricted itself to corporate bond ETFs.

This is only a broad-strokes overview, since many of these firms occupy multiple niches, both in equities and increasingly in fixed income. The point is that if there’s room for 50-plus mutual fund complexes in Canada, there’s certainly room for a dozen or so ETF providers.

Two-horse race for “Core” offerings?

The real battle, however, will not be over niche products but for being the indexed “core” of portfolios. That one, I suspect, will become a two-horse race.

It wouldn’t be good for consumers if a single firm accounted for 90% of ETF sales, whether that firm were BlackRock, Claymore or even Vanguard. As it stands, the giant is the combined “ClayShares” and the emerging giant-slayer is Vanguard. At least in this first year of its existence, it would be healthy for investors to spread some of the wealth to the newcomer.

Because of tax consequences, I wouldn’t be switching non-registered ETFs to Vanguard but I’ve certainly begun to put some new money into their six core funds, both equity and fixed income. And of course, there are no tax consequences to switching ETFs inside RRSPs, RRIFs or TFSAs, although there may be  commissions to consider.

While Vanguard will likely be the cost leader in the Canadian market investors will have to do their own research as to the merits of putting the core of their portfolios into market-cap weighted ETFs like Vanguard’s (or indeed many of the iShares ETFs). I believe this is the best route to go for core positions but others may argue for fundamental or intelligent indexing or even active management.

It’s useful to get back to basics, which is why it’s useful to read here Vanguard’s The case for indexing: Canada, originally distributed last summer. Several useful charts show the performance (or lack of it) of actively managed Canadian equity funds, which it says average 2.23% expense ratios, compared to an average 0.79% for index funds. The spread is less for Canadian bond funds: 1.30% versus 0.69%.

The main event: XIU versus VCE

I said above the real battle will be about becoming the “core” position of indexed portfolios. This being Canada and investors here as elsewhere inclined to considerable home-country bias, it follows that the biggest single skirmish will be in Canadian equity ETFs.

It’s no coincidence Vanguard is being most aggressive in the pricing of its Canadian equity ETF: the Vanguard MSCI Canada Index ETF [ticker VCE/TSX], with a rock-bottom MER of 0.09% or nine basis points. This proxy for the broad Canadian stock market is up against the dominant iShares i60s [XIU/TSX], which has an MER of 0.17% or 17 basis points. That’s wonderfully low when pitted against any actively managed Canadian equity mutual fund but not low enough when Vanguard has entered the market.

As RRSP season progresses and into March, we’ll be conducting a few “live chats” with some of the major ETF players. The first is scheduled for Feb. 22nd. More details will be provided as the time approaches.

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