Should your retirement date be a surprise?

kevinhead1

Kevin Press, Sun Life Financial

Sun Life Financial assistant vice-president Kevin Press has penned a retirement planning article carrying a provocative headline: “Your retirement date will probably be a surprise.”

Published at www.brighterlife.ca, Press cited the most recent survey of Sun Life’s Canadian Unretirement Index and its startling finding that only 31% (fewer than a third) of Canadian retirees said they stopped work on the date they had actually planned. This attracted a fair bit of social media commentary, including my own predictable quip attributed to deceased Beatle John Lennon in his final album: “Life is what happens to you while you’re busy making other plans.”

Employers set the date a quarter of the time

At one level, the inimicable Press is of course correct. The precise date of retirement isn’t always a variable under one’s complete personal control. In these days of corporate cost-cutting, there’s little guarantee that one’s employment in a particular firm will last to the exact and convenient day of your projected retirement. One in four said they left their jobs because an employer decided that was the way it was going to be. The decision was forced by the employer for 10% of those surveyed, while another 15% took their employers up on their offers of early retirement.

Health is another major factor

But even if they love you and are willing to throw frequent raises and bonuses your way, your health may not cooperate. Sun Life found a whopping 29% reported their work lives ended prematurely because of “personal health or medical reasons.” Another 2% left not because of their own health but because of the deteriorating health of a loved one for which they had to care. Adding 14% more who experienced unexpectedly early retirement for other “unspecified” reasons, that’s 69% who did not finish their career as they had originally planned or expected.

This is all interesting data but should not be viewed as a particularly disturbing trend. Retirement planning is as much an art as an exact science and any financial planner will tell you that, even if employers and health are in your favor, there are many variables that will change the exact finish line. Stock markets will vary, as will interest rates, currencies and other factors. Even the related concept I call “Findependence Day” I have described as a moving target: if markets go on a tear the last few years before your planned departure from the workplace, your liberation from work may happen a few years earlier than it might otherwise have been. If markets languish in an extended bear market, you’ll probably decide to hang in there a few extra years, again assuming robust health and a willing employer.

Freedom 66?

In fact, a Sun Life ebook authored by Kevin Press quantified this in the wake of the 2008 financial crisis. Based on the traditional retirement age of 65, Sun Life surveyed Canadians as to what they thought they’d be doing at age 66. In 2008, 51% thought they’d be retired by that age, and in 2009, 55% thought so. This plummeted to just 28% in 2010 and has hovered between 27% and 30% in the subsequent years to 2013.

At the same time, the percentage who thought they’d still be working full time at 66 rose from just 16% in 2008 to 27% in 2013. Two thirds of those expecting to be working past 65 said they‘ll do so because they “need to” financially. By 2010, the average age at which Canadians expected to retire had jumped from 64 (in 2009) to 68 by 2010 and 69 in 2011. As confidence has returned, this average expected retirement age has since fallen back to 66.

Press’s e-book can be found here, and includes links to several calculators that should make your rough retirement date less of a surprise.

The downside of rising longevity — dementia

Senior man looking after sick wifeHere is my latest MoneySense blog, billed as the “Financial Implications of Dementia.”

For convenience and one-stop shopping purposes, I’m publishing a version here with a different set of photos:

The downside of rising longevity

 

One of the themes I’ve been exploring lately has been longevity – the notion that most of us can expect to live longer than our parents and grandparents. That assumes a lot of things, such as adopting healthy lifestyles, being blessed with good genes and not engaging in harmful behaviours. And of course, as the current Ebola scare reminds us, there’s no shortage of external circumstances that can render moot the idea of extended personal longevity.

But let’s be optimistic. If financial planners reckon on a lifespan of 90 or 95 years for the average client, let’s assume we at least reach our 90s. The unfortunate aspect of this is that while our good habits and advances in medical science may stave off such unwelcome events as heart disease or cancer, it also means there is a greater chance of succumbing to dementia. As RBC Dominion Securities investment adviser Nathan Mechanic told me many years ago, Alzheimer’s can have a devastating effect on family finances.

Dementia portrayed in essays and novels

franzen1

Novelist Jonathan Franzen

On my recent trip to Turkey, I happened to read some books that touched independently on the theme of the scourge of Alzheimer’s. One was an essay by novelist Jonathan Franzen entitled “My Father’s Brain,” contained in his collection, How to Be Alone. In it, Franzen chronicled the slow and painful loss of his father Earl to Alzheimer’s. He depicted it as a series of deaths of various capabilities: memory, mobility etc., wherein the actual physical death of the whole body was merely the final installment of a drama that unfolded over several years.

On a similar theme is Still Alice, a novelized treatment of Alzheimer’s written by neuroscientist Lisa Genova. Written in 2007, it portrays the onset of early Alzheimer’s at age 50 of cognitive psychology professor Alice Howland. It was turned into a film of the same name in 2014. For those who enjoy medical thrillers. Genova has been described as “the Michael Crichton of brain science.”

100 tips to stave off dementia’s onset

100thingsI also read an e-book I’d recommend to anyone interested in this topic, or who may already have gone through the experience with a parent or other loved family member. It’s called 100 Simple Things you can do to Prevent Alzheimer’s and Age-Related Memory Loss, by Jean Carper. The book was published in 2010 and the author dedicated it to her mother, Natella, who made it to 95 without dementia but spent a “final year with probable vascular dementia.”

I’d guess many baby boomers will be in a similar situation by the end of their long lives: 90 or 95 years of relatively strong mental health, followed by a year or two of this type of loss of mental acuity. So what are the 100 tips we can act on to minimize our chances of being afflicted with dementia? Here are some of the main ones that left an impression on me. Number one is to “Get Smart About Alcohol.” It stands to reason that excess drinking cannot be a good thing for our brain cells, although Carper concedes the benefits of modest (a glass or two) of red wine on occasion. And rest assured, chocolate lovers, you may be able to safely indulge in similarly modest consumption of dark chocolate, but less so milk or white chocolate. And yes, it’s okay to “say yes to coffee” and we don’t need to be afraid of caffeine.

Carper also recommends drinking apple juice or “juices of all kinds,” eating berries every day, eating curry, nuts, olive oil, spinach, tea, vinegar, fish and various other good foods. She recommends the Mediterranean Diet. And yes, exercise is a fine thing even if it’s just fast-paced walking. Sleep is important and meditation is helpful. It helps to be married and have a large social circle. Avoid red meat, avoid inactivity, beware the dangers of fast foods, control bad cholesterol and avoid environmental toxins.

If you have an interesting job, don’t be too quick to retire: work is an excellent way to keep your brain active. Alternatively, web surfers will be pleased to learn “Googling” is good for the brain, as are video games. So is learning another language. Build strong muscles, take multivitamins, and take regular nature hikes. The author even suggests “considering” medical marijuana, assuming it doesn’t entail breaking the law. But “forget about smoking” cigarettes and cut down on sugar.

Much of this is common sense and you may have heard some of these tips before. But if you can tick off more than half these items, my bet is you will have made a great start in delaying the onset of this affliction for yourself or anyone you love.

The Road to Global Prosperity

globalprosperitybookMuch has been written about globalization, often with a negative slant. It’s refreshing to have a more upbeat take on the topic. As the title of Michael Mandelbaum’s latest book underlines, the most likely though not inevitable outcome of Globalization is global prosperity, meaning economic growth for most of the nations involved.

Mandelbaum is one of America’s leading authorities on international affairs and many of his 13 earlier books also tackled global macroeconomics.  The Road to Global Prosperity is divided into four parts, with intriguing sectional titles like The Roof, The Gates, the River and the BRICs. The latter is the familiar acronym for Brazil, Russia, India and China, the four leaders of Emerging (or arguably Emerged) Markets.

Roof, Gates, River

The Roof is a reference to “Protection” and the role the United States has played in providing a measure of security to the global economy. The Gates refers to global trade, free markets and protectionism or efforts to eliminate it in order to grow the global pie for all nations. The River is money and national currencies.

Mandelbaum reviews the causes of the 2008 financial meltdown, the troubles facing Europe and the Euro, and the reduced growth of even the four BRIC nations in the aftermath of 2008; and yet he remains optimistic about the future prospects for the  global economy. Despite the obvious challenges in the Middle East, China, Russia and other global hot spots, he nevertheless says “there are powerful reasons to believe that globalization will continue to make the world richer.”

Globalization is irreversible and positive

Michael Mandelbaum

Michael Mandelbaum

Warts and all, globalization is “both irreversible and a positive force for the United States and the world.” Technology and the Internet are bringing nations together (though he doesn’t use the term global village) and national leaders are increasingly aware that maintaining political power will depend on giving the electorate prosperity. As a result, he expects war to be muted and countries will try to cooperate more, with their economies growing as the connections to other nations and trading partners increase.

In short, it’s an optimistic view and one that is a welcome alternative to the depressing tidbits of daily news spewing out of all corners of the globe and into the 24/7 news cycle. Not that there aren’t tremendous vexing challenges ahead. The short concluding chapter is titled Fault Lines, and Mandelbaum makes no bones about the fact the global economy ultimately depends on the fortunes of his own country: “The public good of security will be provided to the world by the United States or it will not be provided at all.”

In particular, in order to keep productive economic activity going in the Middle East and East Asia, the U.S. will have to keep in check North Korea and Iran. If it fails, “the world will be a less stable, less prosperous place.”

He closes by reminding us that Globalization “will surely continue on its upward path; but for the billions of people on board, the ride will just as surely be a bumpy one.”

 

Lifestyle Rebalancing

Pretty scary markets the last few weeks! Here’s my latest MoneySense blog, entitled A different kind of rebalancing. It looks at the topic of rebalancing not just from an asset class perspective but also from a lifestyle point of view. Mind you, it was written in the summer and recounted what I was doing in the spring when markets were still moving to ever-higher records.

Right now? Not so much!

The web as the great equalizer in graphic design

99designsimageI recently created a logo for a new web-based business I’m developing and found the whole process fascinating. Thanks to a suggestion from Liz Harding at Knightsbridge, I launched a one-week contest at 99Designs. My cost was just $299 and true to the company’s name, I received well over 99 design suggestions from designers all over the world. You can see the one I chose at the bottom of this post.

While you’re going through the process, you can’t tell where the designers are located geographically. In one case, I knew I was dealing with a French person, probably from France. In the end, the designer I selected turned out to be from Indonesia.

Global contest results in cornucopia of design ideas

Which is fascinating by itself. Think about the old days. If you wanted to create a logo for a business card or letterhead, you’d probably have ended up with the friend of a friend, or got a referral from a friend in an advertising agency locally. Odds are you would have dealt with the person face to face. Probably, though, your design would have been limited to the particular talents and capabilities of the person that came into your orbit through your personal network.

With 99designs, you end up with a wealth of design ideas drawn from talented artists and graphic designers anywhere in the world, which means you probably end up with a nicer design and one that is competitively priced. 99design even lets you create polls so you can get feedback on the designs you’re strongly considering, and the site makes it easy to spread the word on the poll(s) through the major social media.

Winning logo design for Jon’s new business cards

Those who follow me on Twitter, Linked In, Facebook or Google Plus may already have participated in one of those polls though I’m not clear whether they will also be able to see the final design I picked. I’m still tweaking the new company name and website but am happy to show the image on the right.

I’ve certainly noticed other references to 99Design on Twitter so it’s clear this trend is catching on.

Once you select the winning designer, there is a hand-off process that takes a day or two, where you’re put in touch with the designer, you make some final tweaks and then you’re sent the design in an electronic format you can use. This transfers the copyright on the design to you and when this is agreed on at both ends, 99design releases the funds to the designer. It also tries to upwell you on using that designer or others to apply the design on your web business, letterhead and numerous other possible applications for it, including using it on your social media.

 

 

Extended Vacation as Mini-Retirement or Rehearsal for Retirement?

CappadociaBalloons

Ballooning in Cappadocia, Turkey. Photo by Helen Chevreau.

Half way through a three-week vacation in Turkey, I’ve been experimenting with the idea of integrating a little work with the travel. As my daughter has noted after a long summer of independent travel, everyone has SmartPhones these days and it’s not hard to find places with wireless: all hotels and most good restaurants have them, and many other places as well.

Roaming charges from North American telecom suppliers are prohibitive so we do what the student travelers do and leave the devices permanently in Airplane mode. That means enforced SmartPhone vacations from email and social media during times between wireless access but hey, it’s a vacation too, right?  And anyway, who wants to be connected all the time?

Endless Summer

BodrumWater.copy

They’re still swimming in Bodrum. Photo by Jonathan Chevreau.

In blogs earlier this summer (a summer that for me has extended through a lovely September in Toronto and now an even sunnier continued summer in Turkey), I described Tim Ferris’s idea of mini-retirements, described more fully in his best-selling book, The Four-Hour Workweek.

For me, the longest vacation I’ve had until now was two weeks long: my honeymoon in 1989, and two subsequent fortnights (as the British call them) in Europe and Scandinavia. So three weeks is a record but I can see how those of us from colder climates might eventually want to arrange their “Findependence” to include stints of eight or ten weeks in a row nicely timed to avoid January, February and the first half of March. (the depths of winter in Canada and the northern United States).

I’ve referred before to the American folksinger Phil Ochs and his (I believe) last album, entitled Rehearsals for Retirement. I won’t rehash my usual distinction here between traditional Retirement and Financial Independence but suffice it to say that a longer-than-the-normal two-week vacation can be considered either a Mini-Retirement or a Rehearsal for Retirement (or both?).

You can “work” during Mini-Retirements

TurkishBath

When in Turkey …. Turkish baths. Photo by Jonathan Chevreau.

Since my notion of Findependence sees a continued role for work and creativity well into one’s 60s and 70s, a Mini-Retirement or Retirement Rehearsal simply means travel along the lines this Turkey trip has gone but more so.

As you can see by reading these words, I felt moved to write this blog while still abroad, if only because I need to have some words to surround the photos that accompany it. I’ve been posting such photos to my Twitter and Facebook feeds all along but not without the context a longer blog can provide.

As was the case when I was blogging from home this summer, I’m composing the first draft of this on my laptop outside. As I sit on the second-floor balcony of the Su Hotel in Bodrum, Turkey, the sun is hitting my feet but the rest of me is in shade. Below and in front of me I can see a long lap pool that at night is lit up in my favorite shades of blue and green. Even at mid-day you can still hear the odd rooster crowing, though nothing like they do around dawn. Later, during a final edit and with lunch beckoning with the family, I’m sipping a glass of local red wine.

The longer the Mini-Retirement, the more work may play a role

 

cave2

Underground caves of Cappadoccia. Photo J. Chevreau

Thus far, this vacation has resembled the one-week and two-week versions: nice accommodation, meals out, guided tours etc. Not what I’d term guerrilla frugality! In the future, if and when we attempt a ten-week stay somewhere like France or Italy to get away from winter, I can see ratcheting down expenses considerably from these levels. Probably, we would rent a house or villa for several weeks, shop for groceries and wine locally, and prepare our own food in our temporary home, just as we would do at home in Long Branch, Ontario. We would have full Internet access and all the gadgets that accompanied us on this shorter vacation: Kindles, iPhones, Blackberries, iPads and laptop computers.

Even during this Turkey trip – wireless permitting – I’ve surprised myself by staying on top of the news as much as I have and similarly monitoring and posting to various social media. The quantity is no doubt much reduced, perhaps to the relief of all concerned. But this trip has confirmed in my own mind that it is indeed possible to combine business and travel to some extent, even if the pleasure/work ratio is slanted heavily to the Pleasure side. For the curious, we do have a family member who is keeping the home fires burning: that means the cat is getting fed and orders for the Findependence Day book are being fulfilled with no delay. The cloud accounting software I described some weeks ago can be accessed remotely, as can our bank accounts and discount brokerage accounts.

While I’ve only made a stab here of testing the idea, I suspect that the longer the mini-retirement (or extended vacation) and the more you settle in one particular spot, the more “work” would play a role — defining “work” as something that creates invoices or at least moves forward long-term creative projects that might one day bring in revenue.

In short, the rhythms of life continue. In many respects, it’s the best of all worlds and I look forward to trying an extended “Mini Retirement” as early as January of 2016 (plus of course shorter vacations in the meantime).

Save money & space on consuming culture

Public library lends both physical and digital books. Photo by J. Chevreau

Public library lends both physical and digital books. Photo by J. Chevreau

I’ve been watching Orange is the New Black on Netflix lately, which has got me thinking about the possessions we really need in retirement or semi-retirement. Yes, retirement can be expensive if you insist on multiple residences, luxury vehicles and frequent exotic locations. On the other hand, you can get by on a lot less and as the old saying has it, the best things in life are free.

Were I to be in the unfortunate situation of doing time in a maximum-security prison, I think I’d be relatively content as long as I was permitted to have one small device: my Apple iPhone 5S or its equivalent from other companies. Of course, we’d need Internet access to to make it useful.

iphone_5s_apple_store

All you’d need if you were incarcerated?

Consider what you can do in the palm of your hand with any modern SmartPhone: you can read e-books, listen to music (I recently downloaded Leonard Cohen’s excellent new album, Popular Problems, on iTunes). Watch movies on Netflix, Hulu etc., and of course engage in all sorts of personal interactions on social media, keep abreast of the latest news from electronic newspapers anywhere, or digital magazines.

Not all of this cornucopia comes free but a lot of it does. Many people use Twitter feeds as a substitute for subscriptions to newspapers, for example. New tablet apps like Next Issue let you subscribe to more than a hundred magazines for $10 or $15/month, depending on whether you want the weeklies or just monthlies.

Libraries have joined the digital age

popup-paperwhite-diffFor books, I’m a big fan of Amazon’s Kindle Paperwhite, shown on the left alongside an earlier version of the device. It’s true that many new releases cost $9.99 or more but you can find many classics of literature for free or next to it. I have previously described a money-saving strategy whereby you download the free book sample on to your Kindle, while simultaneously putting a hold on the physical copy of the book at your local library. That way, you get a bit of instant gratification but also save money. Eventually, you have so many books on hold that there’s a steady flow of books you may have ordered weeks or even months earlier.

You can even get e-books totally free by “borrowing” them from the same library that lends out physical books. Download a free library app called Overdrive, which I’ve installed on both the iPad and iPhone. It works on some other devices but sadly not yet on the Kindle PaperWhite I favor. Overdrive lets you borrow ebooks, audio books, videos and music: they only allocate so many copies of any given work so just like a physical book on hold, you may have to wait until those first in line have received their copies and “returned it.” They don’t actually return ebooks: they merely are stripped automatically off your device after the three-week holding period.

The golden age of downloadable music?

For music, I’ve always been a big collector of CDs and, once upon a time, vinyl records. I still store them at home but most of my new purchases are via iTunes and the cloud. The plus is I don’t have to keep buying new CD holders and — eventually — find ways of adding new space to accommodate them, as well as physical books.

beautiful teenage listening music on the clouds

Music via the cloud: DepositPhoto

Downloadable music may or may not be free. While the days of Napster are over, any young person will give you names of apps that may let you sample music, either particular songs or entire albums. One I’ve tried is called Grooveshark, which can be installed on a PC or Mac and paired with a smartphone with a related app called gsremote.com. This is a free streaming service that lets you listen to music as long as you have wireless access. Presumably, if you decide after a few listens that you like the music, you’d buy it on iTunes or purchase a physical copy in the stores the old-fashioned way. There are of course many other free music streaming services, like Songza, that stream mood music according to the event you have in mind.

Say goodbye to self-storage

As we noted in the “Greatest Tips” package in the June issue of MoneySense, all this free or low-cost electronic culture doesn’t take anywhere near as much storage space as the old-fashioned library. The proliferation of physical books, videos, DVDs, CDs and  vinyl  has definitely slowed down at our home as more of it gets stored in the cloud. I can see that at some point it would be possible to downside to a smaller home or condo, at which point all the physical content could be sold , with all new content going up on the cloud.

Hopefully, it won’t come to just an iPhone in a prison cell, but the general trend is there. We can get by with a lot less stuff, and space to store it in, and downsizing shouldn’t be a huge loss even if you love literature, movies, music and the rest of it. For retirees, this means they will have both freedom and simplicity, plus an abundance of affordable popular culture to help them fill all that time.

 

How to transition to drawing income in retirement

diamondbookcoverIt’s not often I read a book twice and even rarer that I’ve reviewed the second edition of a book. The rare exception is Daryl Diamond’s newly revised Your Retirement Income Blueprint, published by Wiley Canada in 2011 and now in 2014 by Milner & Associates Inc.

A major reason is revealed in the back-cover blurb I supplied for the new edition. When the original came out, I was still fully employed and the idea of retirement or financial independence were just theoretical concepts. But as I say in the blurb, now that I’m transitioning from employment to semi-retirement or self-employment, “I intend to use Daryl’s blueprint as my personal plan for drawing income from a diversified portfolio and other income sources.”

Different skill set for decumulation

Diamond rightly points out that there is a world of difference between wealth accumulation and drawing an income. He’s probably also correct that there are a lot fewer financial advisors who specialize in decumulation, compared to the legions who are focused on wealth accumulation.

Diamond – who like myself was born in 1953 – lays out a six-step plan for creating and implementing a retirement income blueprint. Even on a second read, I still found myself underlining certain passages that must not have penetrated my thick skull originally. Things like the Age Credit and Pension Tax Credit tend not to be top of mind until you actually stand to benefit from them. (And I don’t yet but can see the day fast approaching when I would!)

Where Diamond really adds value is the way he integrates tax planning with a logical order for drawing on various retirement income sources. His “Cash Wedge” or “Floor and Upside” concept seems to me a variation of Asset Dedication: setting up enough cash flow to draw down on for the first two or three years. His discussion of the order in which to draw on government and employer pensions, annuities and registered and non-registered investments is masterful. And his recommendations are not always obvious. For example, he’s generally in favor of taking OAS and CPP benefits relatively early, in part because he has an acute understanding of how higher income later in retirement can impact the aforementioned age and pension credits, or indeed receipt of OAS benefits at all.

In a similar fashion, he advocates using non-registered (or what he terms tax-paid) assets when you move into higher tax brackets.

Sweet spot for age and pension credits

While the editions aren’t hugely different – the blue front cover is virtually identical in both editions — Diamond and editor Karen Milner have done a good job updating everything to 2014. So, for example, you will learn (on page 158) that the tax-efficient net income “sweet spot” in 2014 for someone aged 65 or over is $34,873. Or, a few pages later, that the federal “tax-free zone” is $18,054, which rises to just over $20,000 if the pension credit is generated.

He also makes it clear that letting vehicles like tax-deferred RRSPs grow indefinitely can be tax-inefficient, since that creates what can be a “tax trap” after age 71, when minimum and fully taxable RRIF income starts to kick in. So he shows how you can start withdrawing income from RRSPs or RRIFs to get you to the top end of any given tax bracket, even if the extra (and taxable) income is not required that particular year. He’s also a big fan, as I am, of the Tax Free Savings Account or TFSA.

No doubt I will frequently consult this book personally as I progress to later stages of the “Findependence” journey I’ve been chronicling in these blogs.

All I can say is the $26.95 retail price of the book is trivial compared to the tens of thousands of dollars that could be saved by implementing the steps in the proper order.

 

 

 

 

 

The Seven Sins of Wall Street

IvrySevenSinscoverWith the financial crisis now in the rear-view mirror five years ago, it should be clear sailing for the giant U.S. banks that arguably created the problem, right?

Not according to veteran Bloomberg News editor and investigative reporter Bob Ivry. In his recently published book, The Seven Sins of Wall Street, Ivry pulls no punches about the continued sins of the major players like Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo.

Their collective sins? Gluttony, Wrath, Envy, Pride, Sloth and — he saves the best and most obvious for last — Greed. And as the book’s subtitle suggests (Big Banks, Their Washington Lackeys, and the Next Financial Crisis), the fact that so few of these sins were punished the first time around could mean a repeat of the crisis.

Just when you thought it was safe to go back into the water!

Too big to jail?

Sadly, it seems that the slogan “Too big to fail” could as easily be modified to “Too big to jail.”  We should be “very afraid” of the shenanigans of these financial behemoths  “since the crisis” Ivry writes.

Ivry brings to life the contrast between the lavish lives of the masters of the universe running these institutions, and the thousands of Americans who lost their homes to predatory lending practices and shady mortgages. And he doesn’t shrink from making his own recommendations: the financial giants need to be shrunken down to a size where they can no longer be deemed “too big to fail.” He gives voice to the outrage of Main Street and the essential proposition propagated by these banks that it’s “heads we win, tails you lose.” By which he means, the system is still such that these institutions can take enormous bets with other people’s money (i.e. depositors) and if they win, they go home with giant salaries and even more gigantic bonuses. And if they lose, well again, their mistakes are paid with other people’s money (i.e. taxpayers) and more often than not the executives not only keep their jobs but still end up with enormous bonuses.

Ivry calls for a return to the days when deposits were kept separate from investment banking. Or as he colourfully phrases it, “The easiest way to make the biggest banks smaller is to separate their dice games from Granny’s deposits.” He’d also like to see them exit from commercial activities: “They ought to be financing oil exploration and coal mining, not doing it.”  (my emphasis added).

If you can’t beat them …

Let me add a few points that Ivry does not cover. Since this is a blog about financial independence, it may be worth observing that if you feel there’s little you can do as a small investor about the dominance of North America’s giant banks, you could at least profit from them. If the advantages depicted by Ivry are are as overwhelming as he makes out in his book, then it might make sense to buy an ETF focused on this sector.

For U.S. financials you might try the Vanguard Financials ETF (VFH/NYSEArca), which includes not just big US banks but also wealth managers and financial services issues of all stripes. Canadians wishing to focus on U.S. banks but hedging back into Canadian currency could consider the BMO Equal Weight US Banks Hedged to CAD Index ETF (ZUB/TSX). And of course, seeing as Canada’s big banks sailed through the financial crisis practically unscathed, you could also try the iShares S&P/TSX Capped Financials ETF (XFN/TSX).

Can IPPs give you more room than RRSPs?

My latest MoneySense blog compares the tax-sheltered contribution room available for RRSPs and Individual Pension Plans or IPPs.

For archival purposes and continuity, I reproduce the text below.

stephen-cheng

Stephen Cheng, Westcoast Actuaries Inc.

A few weeks ago, we looked at the topic of raising RRSP limits. As noted then, it was based on a C.D. Howe Institute report that suggested one possible solution to the alleged retirement crisis was simply to go back to the half-century-plus RRSP and raise contribution limits for the (relatively) few affluent people who are forced to save in taxable accounts because they’ve maxed out on RRSP room.

If you’re at top executive or own your own business and are 40 years of age or older, there may be another way to get the benefits of RRSPs. The Individual Pension Plan or IPP is an employer-provided program that replaces RRSP savings by an employee, says Stephen Cheng, managing director of Vancouver-based Westcoast Actuaries Inc. To be eligible for an IPP, you need to receive pension-eligible T-4 employment income. Self-employment income, partnership income and dividend income are not pension-eligible, Cheng says. So if you own your own business, you’d have to pay yourself a regular salary that generates T-4 employment income.

IPP assets are creditor-proof

One advantage is that all eligible employer contributions are tax-deductible for corporation tax purposes, but won’t be taxable to the employee until the plan starts to generate pension income. Also, if the IPP is in deficit after the three-year actuarial valuation, the employer can top it up with further contributions. In addition, IPP assets are creditor-proof: always a plus for the self-employed; and as with traditional Registered Pension Plans, pension income can be split up to 50% with one’s spouse, for income tax purposes (pension splitting).

Advantage rises with age

The older you are, the more the relative room can be held in an IPP relative to an RRSP. For those in the top tax bracket, the maximum RRSP contribution is currently $24,270, an amount that does not vary by age. However, IPP room gets larger the closer you are to retirement. Maximum IPP contribution room at age 40 is $26,097, rising to $31,488 by age 50, $38,005 at 60 and a whopping $41,282 at age 65. In the latter case, the IPP has a contribution room advantage over the RRSP of a massive $17,012 a year!

Employers can make past service contributions to a new IPP in 2014, Cheng says, providing the employee received pension-eligible T-4 type employment income over the years being calculated. The employee must transfer an amount from his or her personal RRSP into the IPP (since 1997 the maximum transfer amount required for each service year has been $24,330, with lesser amounts between 1991 and 1996). For all years between 1991 and 2013, the combined maximum that can be transferred into an IPP from an RRSP comes to $510,470: just over half a million dollars! If the IPP is set up in 2014, the RRSP deduction limit will be reduced to $600 each year, starting in 2015.

The calculations are not simple but you can find a free customized IPP quote online here.

Next Page »