On November 7th, 2014 a new spin-off website to this one was launched, devoted to the topic of Financial Independence.
The philosophy behind the new site was explained in the previous post about reframing the “Retirement” discussion as the emerging alternative paradigm of “Financial Independence.” That blog featured two prominent U.S.-based financial planners, Michael Kitces and Roger Wohlner (aka The Chicago Financial Planner.)
To clarify, the existing site will continue to exist, but chiefly as a vehicle to sell the two existing Findependence Day books, the new e-books and any other spin-off products that may be developed over the years. The new “Hub” attempts to look at the entire topic of Financial Independence from a North American perspective, so will (hopefully) range far beyond the particular books featured on this site.
A prominent feature of the new site will be reviews of other books on Financial Independence, both by me and by guest reviewers I would love to hear from. It will also feature all the other blogs out there on the topic, even those that still bill themselves as personal finance, frugality or retirement blogs. We started with the list of Plutus award-winners that Roger Wohlner featured on his site recently.
We will also have a monthly email newsletter free to anyone who enters their email on the home page of the new site. Better get over there now, and thanks for reading!
Because the Financial Independence Hub is being moved today to a new server to accommodate ever-rising volumes of web traffic, for today we have taken the liberty of posting the normal Monday “Hub” blog here at sister site FindependenceDay.com. The guest blog below is on optimizing CPP benefits: the same subject as my Financial Post column that ran online today under the headline: Optimizing Your CPP is no trivial exercise. Now let’s get it from the horse’s mouth: Doug Dahmer. — Jonathan Chevreau
By Doug Dahmer, Emeritus Retirement Income Specialists
Canadians are an easy going and trusting people. Every year thousands of people, across the country, carelessly start their CPP payments and in the process are forgoing hundreds of thousands of dollars in payments to which they are entitled.
I call this “The Great Canadian Pass Up.”
To ensure you fully appreciate the value of making the right decision, before you elect to a start your Canada Pension, Emeritus Retirement Income Specialists have created a powerful tool CPP Optimizer. Give it a try here.
Most people seriously underestimate their lifetime CPP income entitlement:
Your CPP benefits are a big deal. For a couple, where both spouses have regularly contributed to the CPP plan, the lifetime CPP income they can anticipate will likely exceed $700,000. Consequently it represents an important strategic contributor to the creation of a sustainable retirement income. Therefore, decisions about this benefit need to be taken seriously.
My latest MoneySense blog features 30-year old millennial and financial writer Sean Cooper, who is having a mortgage-burning party tonight to celebrate his paying off his mortgage in just three years. See Mortgage free by 31.
The book argues in particular that “the foundation of financial independence is a paid-for house.”
Cooper apparently took this message to heart because. He doesn’t even turn 31 for a few more months and has set his next goal to achieve a net worth of $1 million within four years. Well done, Sean, may you serve as an inspiration to your generation!
Click on the above link at MoneySense to find the full Q&A I conducted with Sean or see below.
The publisher of the U.S. edition of Findependence Day (available from Trafford.com in hardcover, paperback and ebook formats; click here to order) is organizing a blog tour for the book that kicks off Monday, July 27th and winds up on August 7th. Click here for the Indie Book Tour, or see below.
As of this summer, the US edition is now also available through two book distributors: Ingram and Baker & Taylor, as well as American libraries.
Here’s the current blog tour schedule for Findependence Day.
Having planted a stake firmly in the camp of Financial Independence, I’m often asked exactly how the phrase Findependence is different from Retirement.
There are a lot of distinctions between the terms, many of them subtle ones. I often say that Financial Independence means working because you want to, rather than because you have to financially speaking. In the latter case, the situation is akin to the bumper sticker that says “I owe, I owe so off to work I go.”
I may also say that Findependence (I’ll use the contraction of Financial Independence here now) often occurs years if not decades before traditional retirement. There are several Early Retirement practitioners running websites about how they achieved Financial Independence in their 30s or 40s, although they usually add that they continue to “work” in the sense of doing some work for money. That “work” will typically be as an independent supplier rather than an employee and may consist of writing books, running web sites and perhaps publicly speaking. They call this “Early Retirement” but I’d argue the better term is “Early Financial Independence.”
You can find more on this topic by simply googling the term “Financial Independence vs. Retirement.” You’ll find several results, including a couple of articles by me that have appeared in various web sites both Canada and the United States.
Consider this piece from FI Journey entitled Financial Independence vs Early Retirement: What’s the Difference? Here’s how the writer sums it up: “Financial independence is setting an annual income goal for yourself, and putting your money to work in such a way that you can live off the proceeds from your investments without ever reducing your retirement account. If you started your ‘retirement’ with a million dollars in the bank, the idea is that you would die with a million dollars in the bank, whether that was 5 years or 50 years later.”
Working even if you don’t need to do so
Then there’s an article from a year ago featuring a dialogue between two Early Retirement gurus, J.D. Roth of the Get Rich Slowly blog and the blogger known as Mr. Money Mustache: Coming to terms: retirement vs. financial independence. There, Roth notes that both bloggers have accumulated nest eggs that would allow them “never to work again” yet “both of us have elected to continue doing work for money.” Even so, they still consider themselves “retired.”
Mr. Money Mustache, aka “Pete”, replied that only certain personality types will sit around doing nothing in retirement but for him, retirement “just means you’re free to do what you really want to do.”
Roth said they both think it’s possible to call oneself “truly retired” even if they continue to work for money but added that not everyone agrees. One reader maintained that “retiring is stopping doing work for pay.” Then Roth segued to an excerpt from his one-year Get Rich Slowly Course that outlines four types of retirement: traditional “full-stop” retirement at 65 or so, Early Retirement that can occur between 30 and 50, Semi-Retirement and finally a series of “Mini Retirements” that can be distributed at various points of a long career of work.
Let’s retire the loaded word Retirement
Roth concludes much as I would, saying that because Retirement is a loaded word, he prefers to use the term Financial Independence, which he says “is essentially the same idea but without the baggage.” He also talks about something we’ve mentioned in this blog before: that there are degrees of Financial Independence, ranging from dependency on parents or employers, to dependency on creditors, to freedom from debt, to what I’ve called “barebones” Findependence and finally “complete” financial independence. He decides that once you’ve saved enough to fund 25 years of your current lifestyle, you’ve achieved financial freedom.
Note there is also a short video accompanying the online article, and a growing number of comments below the piece.
Here is a preamble I wrote for it:
Series Rationale: One of the most experienced personal finance writers in North America is the Wall Street Journal’s Jason Zweig. As he wrote here after writing his 250th Intelligent Investor column, he confessed that there are only a handful of personal finance stories out there:
“I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself. That’s because good advice rarely changes, while markets change constantly.”
In this seven-part series, I look back on my two decades plus of writing about money to distill it all down to these “seven eternal truths.”
As far as I know, the second instalment will run next Wednesday and subsequent Wednesdays over the summer.
Here is a non-surprising fact. Most retired individuals do not choose to voluntarily annuitize their accumulated wealth or savings at retirement. They prefer the lump sum. This has been christened by financial economists: “the annuity puzzle” and has been the topic of Ph.D. theses for decades. I am guilty of supervising a few of these myself.
Sadly, life annuities are relatively unpopular – especially compared to stocks and bonds — in a large part of the world and simply unavailable in most others. Indeed, the few jurisdictions and countries in which there is a sizeable market for annuity products – such as Canada or the U.S. — it is often driven by tax-advantaged treatment and/or government “nudging and defaults” as opposed to an intrinsic consumer appreciation for longevity insurance. Like most insurance products, they are ‘sold’ but rarely purchased.
Could the past hold the key to Longevity Insurance?
Well, I believe one of the reasons for the lack of interest or disdain for life annuity products – while the demand for fixed income bonds is undiminished — is the opacity, public confusion and limited selection of mortality credits; which are the raison d’etre for annuitization. Indeed, there are hundreds of ways to save (i.e. accumulate) money for retirement – instruments such as stocks, bonds, mutual funds and ETFs – but there are precious few choices for dissaving (i.e. de-accumulating) and generating income in retirement.
So, here is my pitch. Perhaps a resolution of the so-called retirement “annuity puzzle” is to design products that make it easier for buyers to determine exactly what they are getting in exchange for giving-up liquidity and sacrificing some bequest and legacy value. In fact, these sorts of products that I have in mind were available and quite popular centuries ago. It might sound odd, but when it comes to finance and insurance products, I look to the past for inspiration.
King William’s Tontine
Here is the story. In the year 1693 – back in England — the government of King William III, previously known as William of Orange, needed vast sums of money to finance his war against King Louis XIV of France. This was actually year or so before the Bank of England was established primarily to finance wars, and parliament was in the early stages of experimenting with new and untested borrowing schemes.
Anyway, parliament decided to borrow the money — in increments of £100 units — from wealthy investors in London and abroad. Today we might call what they issued a government bond. In fact, it operated in a way that was quite similar to modern day debt instruments, except for one very small but rather chilling feature.
Investors or buyers would receive annual coupons of 7%, paid semi-annually by the Exchequer. Year after year the bond paid £7 to investors who were willing to ‘lend’ King William and his government the £100 in the year 1693.
But – and here is the key – if and when the investor or bond buyer passed away and died, he or she would not be able to bequeath or bestow the investment to a family member or loved one. The investment benefit would extinguish itself upon death. Instead the forfeited 7% coupons would go to those still living. To paraphrase Mr. Goldfinger in the famous movie named after its main villain, the ‘bond’ was ‘expected to die’ with the master.
This ladies and gentlemen is a tontine (rhymes with Drunk Queen) scheme.
Tontine: The dead subsidize the living
If this sort of arrangement seems odd and morbid – and you wonder why anyone in the world would buy such an odd thing – think about it carefully from the perspective of those who didn’t have the misfortune to die young. The longer they lived, the more income and cash they received, that is other people’s money. The coupons increased with age; which actually served as an inflation hedge of sorts. After all, living to a grand old age can be rather expensive today or in the 18th century. In the case of King William’s Tontine – as this scheme was known — the oldest known survivor lived to the amazing age of 100. She earned thousands of pounds per year, which is quite the pension and envy of many retirees today.
Over time this tontine scheme and many others were superseded by ‘the sturdy bond’ we use today and insurance companies took over the business of selling ‘retirement life annuities’, which are based on the same principal.
The pension and income annuity we all know today is a distant relative of the tontine. Alas, a number of countries banned these tontines outright in the last 19th century, partially under the misguided fear that some of the longer living investors might try to kill each other. To my knowledge, this never happened.
Time to resurrect tontines?
Sadly though, today, tontines are more likely to appear as a plot in a fantastical murder mystery or as punch line of a joke, rather than in serious discussions about government financing. But in fact, there is a strong argument to be made that these sorts of tontines should be resurrected from the dead and re-introduced in the 21st century. I think it is time to look to history for new (or old) ideas.
In sum — and without getting too technical here — my simple back-of-the-envelope calculations indicate that if retirees were willing to allow for a just a little bit of “demographic variability” around their income, they could increase their expected retirement income by 10% to 15% without taking on any stock market (or any other) risks. Stated differently, your Findependence Day might arrive a few years earlier.
Intrigued? More questions? Read the book: KING WILLIAM’S TONTINE: Why the Retirement Annuity of the Future Should Resemble its Past (Cambridge University Press, May 2015)
Moshe A. Milevsky is a tenured professor at the Schulich School of Business at York University and Executive Director of the IFID Centre at the Fields Institute for Research in Mathematical Sciences in Toronto. He has published 12 books, over 60 peer-reviewed papers, hundreds of newspaper and magazine articles and serves on the editorial & advisory board of numerous scholarly journals. He has written for the Wall Street Journal, the Globe & Mail, the National Post and Research Magazine. Moshe has also delivered more than 1,000 lectures and keynote presentations to audiences around the world. He was recently selected as one of the 35 most influential people in the financial industry by Investment Advisor magazine. In addition to being the author of King William’s Tontine, he is also the co-author (with Alexandra Macqueen) of PENSIONIZE™ YOUR NEST EGG (2nd edition, WILEY, April 2015).
Details are still sketchy but both major daily newspapers are reporting a plan by the Conservative Government that would let Canadians boost their payouts from the Canada Pension Plan by letting them voluntarily contribute more.
Whether this constitutes enough federal action to get the much-criticized Ontario government proposal for an Ontario Retirement Pension Plan (ORPP) overhauled or aborted remains to be seen. All along, it seems, Ontario went out on a limb with ORPP out of frustration that the federal government seemed disinclined to expand the CPP. Certainly an involuntary expansion that would have forced businesses to take on higher payroll expenses would not have been an easy sell but a voluntary scheme is quite a different matter.
Consultations will be held in the summer to flesh out the details, Finance Minister Joe Oliver said in the House of Commons Tuesday. The Globe observes that labor groups and seniors advocates like CARP do not believe that voluntary savings vehicles work and that therefore a mandatory expansion of the CPP is needed to make sure Canadians save enough for retirement.
Oliver sees the voluntary expansion working in concert with the new improved TFSAs as well as Ottawa’s PRPPs (Pooled Registered Pension Plans).
Voluntary CPP expansion makes sense, especially for those who lack true DB pensions
The voluntary expansion of CPP makes sense to me, since — like RRSPs and TFSAs — it involves individual discretion. One attractive thing about the CPP is that it acts like a real inflation-indexed pension, just like the employer sponsored Defined Benefit plans that so many politicians and government workers will be counting on in their old age.
As finance professor and author Moshe Milevsky has argued in the new second edition of his book, PensionIze Your Nest Egg, RRSPs, RRIFs, TFSAs and even Defined Contribution plans (like the PRPP), are not true pension plans but are capital-appreciation plans. In order to get the guarantee of an income for life, they must be converted into life annuities or hybrid vehicles like variable annuities.
In fact, so valuable are government pensions like the CPP and Old Age Security that many near-retirees who lack true DB pensions plan to delay receiving CPP/OAS benefits until their late 60s or age 70, in order to get much bigger payouts of CPP and OAS. The greater your expectations for living to a long and healthy old age, the more valuable true pensions become.
Based on what little we know so far, a voluntary CPP expansion sounds promising but the devil of course is always in the details. If, for example, Ottawa created a mechanism to allocate some portion of severance packages into voluntary extra CPP contributions, that would be a boon to anyone caught in corporate downsizings and mergers. And there are many other ways a more flexible voluntary CPP expansion could be made to work.
Regular readers will know that if I had my druthers, the headline would read more like the one we’ve displayed above: “Why Work probably won’t end after your Findependence Day.” (that is, the day you achieve Financial Independence).
I don’t view the terms Retirement and Financial Independence as interchangeable. By definition, Retirement (or at any rate, traditional full-stop Retirement funded with a generous Defined Benefit pension) means no longer working for money. Financial Independence (aka Findependence), on the other hand, can occur years and even decades before traditional Retirement and so seldom means the end of productive work.
This very web site — as well as the now six-m0nth-old sister site, the Financial Independence Hub — is dedicated to clarifying this distinction. And of course the Hub also constitutes a big element of my own personal Encore Act: next Tuesday will be the one-year anniversary of my own Findependence Day. In my case, I define that as no longer working as an employee of a giant corporation or government entity, and having the financial resources to work if I choose to, and not if I don’t.
Click on the link for details, but in a nutshell — and has been extensively reported in the media, such as this piece by Gordon Pape (subscribers only) — there’s no reason why you can’t add another $4,500 to your Tax Free Savings Account right now, in addition to $5,500 you may have contributed anytime on or after Jan. 1, 2015. (Note to American readers: the TFSA is the equivalent of Roth IRAs, providing no upfront tax deductions but which let you eventually withdraw money tax-free in Retirement or for other purposes).
That means a whopping $20,000 per couple. Now while Liberal Leader Justin Trudeau seems to think only “rich” people have that kind of money available, the fact is that many hard-working middle class people have been saving and investing for the better part of two or three decades, and built up substantial non-registered or “taxable” portfolios. Even though they may have paid income tax to acquire the capital in the first place, over those decades they have been paying annual taxes on interest, dividends and (often) capital gains generated by that capital.
As the column points out, those who have built such “open” portfolios don’t have to use new cash to put $10,000 per annum into their TFSAs. They merely have to start transferring their non-registered securities into their TFSAs. This is called a “transfer-in-kind” but as I have pointed out here and elsewhere (see for example last Friday’s piece in the Financial Post: The Million-Dollar Tax Problem), the tax rules are complex. In a blog I wrote this week for Motley Fool Canada, we also look at How to make an extra TFSA contribution if you don’t have $4,500 lying around. Read more
A global study on retirement finds 15% of Canadian workers don’t expect to ever fully retire, but many plan to downshift gradually into semi-retirement.
Compared to 14 other countries surveyed, Canadians do well in reaching their later-in-life goals, even if they have to spend all their wealth and leave less to their children.
HSBC’s latest global report — The Future of Retirement, Choices for later life – surveyed 16,000 working-age and retired people, including 1,000 Canadians.
When asked about their attitude towards spending and saving, 27% of working-age Canadians say “spend all your money and let your children create their own wealth.”
The study also found Canadian retirees are much more likely to reach their later-in-life goals than some of their counterparts in other countries. 44% of Canadian retirees have reached “at least one of their retirement hopes and aspirations,” well above the global average of 24).
Mixed sentiments on semi-retirement
Canadian retirees are among the most likely to feel forced into semi-retirement, but almost half of those still in the workforce are planning for it. Only 17% of today’s fully-retired Canadians say they semi-retired first, versus 45% of working-age respondents who say they plan to semi-retire before taking the traditional full-stop retirement.
While semi-retirement can be forced on some as employers look to downsize older more expensive workers, many full-time workers actually aspire to semi-retirement. 15% of Canadians who are retired say they made the decision to semi-retire due to a lack of employment opportunities later in life. Only Australian retirees (17%) reported a lack of job prospects in greater numbers than Canadians, and respondents from both countries were well above the global average (10%).
“This latest research suggests that older Canadians and those approaching retirement age may also be feeling the pinch of underemployment at time when saving for the future is often at its most crucial,” said Betty Miao, Executive Vice President and Head of Retail Banking and Wealth Management, HSBC Bank Canada, via a press release distributed Wednesday (April 29).
Semi-retirement can also be forced on mid-career workers
Even among younger workers, 10% of survey participants between the ages of 45 and 54 admit their shift into semi-retirement wasn’t their personal choice. HSBC suggests that in the post-downturn job market, many experienced workers are being overlooked for full-time positions. In fact, half of all semi-retired respondents globally say they changed careers when they stopped full-time work. HSBC says some of these will be high achievers who reached their career aspirations and financial goals before retirement, but the figures “also point to a pool of wasted potential among experienced employees.”
The research also shows a major shift in how Canadians plan to retire in the future. While only 17% of those now fully retired say they semi-retired first, 45% of working-age respondents plan to semi-retire before taking full retirement. Around the world, an average 26% of working-age people plan to semi-retire at some point.
Miao says that with expected shortages of skilled labour in some sectors and professions “career opportunities look bright for at least some of those planning to work into their golden years.”
The full global and Canadian retirement survey reports and online retirement planning tool are available online here.