Retirement STILL Rocks!

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By Heather Compton and Dennis Blas

Special to FindependenceDay.com

Since retiring in 2004, we’ve learned a thing or two.  Foremost, a rockin’ retirement requires more than a bucket list: it’s not a given, it’s a statement of intention. A satisfying retirement requires finding new ways to satisfy our needs and utilize the skills and talents that give us the greatest satisfaction. Like a working career, a retirement career unfolds, develops, progresses and changes as life circumstances unfold. This doesn’t mean some front-end planning won’t be useful. Our cornerstones for a rockin’ retirement include Lifestyle, Relationship and Finances.

Go-Go to Slow-Go to (sigh) … No-Go

Many of us will have a third act lasting 30 plus years and few will plan for the full-stop retirement of a previous generation.  All play and no work also makes Jack a very dull boy! We may think of retirement as one long time frame, but those who study aging divide it into three distinct phases: the go-go, slow-go and no-go years. Certain Victory Lap careers, travel destinations and budding interests must be pursued in the go-go years; others might wait until the slow-go. Either way, you’ll want to mind-bank lots of great life experiences to relive in the no-go years! Read more

Can’t afford to retire? Semi-retirement is more fun anyway!

otm-boomers-181016_frame_704My recent blogs on Semi-Retirement seem to have struck a chord.  After I wrote this online piece for MoneySense.ca: Semi-Retirement is the Future (and a version here on the Hub, under the headline The Next Boomer Wave: Semi-Retirement), I was interviewed by Peter Armstrong at CBC TV’s On the Money Show.

The context of the CBC’s Tips for Boomers segment was in part my new book Victory Lap Retirement, written with Mike Drak, who describes it as a “retirement book about NOT retiring.” The first of several excerpts ran in the Financial Post  a week ago Monday, and the second on October 31st.

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CBC’s Peter Armstrong (Twitter.com)

After the CBC segment aired, Peter published his own blog covering similar territory, which you can find under the headline You’re Never Going to Retire — and Here’s Why. He picked up on my statement that the Millennials are going to live a long time and therefore will have an 80-year investment time horizon. I mentioned that a few weeks ago, when I gave a talk to T.E. Wealth in Ottawa about financial advice for Millennials.

Long-lived Millennials need to be mostly in stocks

Citing the book The 100-Year Life (reviewed on the Hub here by Mark Venning of ChangeRangers.com), I suggested that anyone with an 80-year time horizon should be 100% in equities and certainly avoid fixed-income investments that pay virtually zero rates of interest net of inflation. I subsequently wrote a blog for Motley Fool Canada that came out of the T.E. Wealth session: it features an investment veteran in his late 60s who is himself still 100% in stocks and sees himself as having a 50-year time horizon even now. See Stock Pickers Rejoice: Markets aren’t Efficient, Investors aren’t Rational.

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How Buying a Home makes you Financially Independent

Home insurance concept and family security symbol as a bird nest shaped as a house with a group of fragile eggs inside as a metaphor for protection of residence or parenting.

By Jam Michael McDonald, Zoocasa

Buying a home takes a lot of planning and can be an expensive endeavour. You have to think about your down payment, your mortgage and mortgage payments, your expectations on your space, your timeframe, your closing costs—the list is endless.

So if you’re spending a bunch of money, how can buying a home make you more financially independent?

First, change your perspective

Some investments are a lot clearer: put your money into this GIC and you’ll receive this return in this many days. It’s easy to see, easy to calculate, and easy to do.

Investing in real estate is an entirely different game, so you have to think of it differently. You’ll have initial costs, you’ll be forking out money, and you’ll feel kind of broke. And that’s okay. These “expenses” when buying a home should be looked at as part of the overall investment. There are some that are pure cost—home inspection, lawyer fees, other closing costs—but they all allow the transaction to occur, and they’re not extravagant compared to the cost of the home.

Think of a real estate investment as long-term, not short-term; complex, not simple; hands-on, not passive.

You can make real decisions about your home to save you money

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Reintroducing Tontine Annuities Might Shave Years off Your Findependence Day

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Moshe Milevsky

By Moshe A. Milevsky

Special to FindependenceDay.com

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

tontinebookHere 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). 

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Merely leaving the nest is NOT my idea of Financial Independence

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Is the little bird kicked out of the nest truly “Findependent?”

 

My latest blog for MoneySense posted today carries the curious headline that most Millennials expect to achieve “financial independence” by age 27. I put “air quotes” around the phrase financial independence because of course it’s nonsense that merely leaving the nest and putting fewer demands on the Bank of Mum and Dad constitutes true financial independence.

Keep in mind that the research firm cited in the piece seems to use quite a different definition of Financial Independence than the one used at this site or as formally defined at Wikipedia. For research firm yconic, it seems financial independence means merely leaving the nest and landing a job that pays at least the monthly rent: they are  merely “financially independent” of mum and dad.

Even with that loose definition, only 56% of older millennials (aged 30 to 33) say they have “achieved financial independence.”

With these savings rates, true Findependence for many millennials is a pipe dream

It’s just as well they’re using such a loose definition because the way the younger generation spends, it’s going to be a long long time before they achieve the kind of financial independence this blog describes.

To sum up the difference, I’d say “our kind” of Financial Independence is being able to stay afloat financially without the traditional source of single income known as “a job” or full-time employment. It’s quite a leap to go from moving out of the parental nest to being able to survive with neither parents nor an employer to keep those regular financial injections into your bank account.

Far from being findependent, almost half the millennials surveyed (46%) admitted “saving money is a struggle” even if they are able to afford to pay the bills. A third say they are living paycheque to paycheque and are barely making ends meet. Fully 43% still rely on their parents for financial assistance, including 37% who look for help paying their student loans off. Does that sound like “our” kind of financial independence?

Non-saving millennials should find a Government job with a DB pension and stay there

I hate to break it to the non-savers but if they don’t start saving soon, they’ll never be able to achieve true financial independence. They had better be prepared to work until age 67 and be able to live on Social Security (in the US) or on the Canada Pension Plan, Old Age Security and possibly the Guaranteed Income Supplement (GIS), or find a good Defined Benefit pension plan somewhere and hang on to the job for three or four decades.

If there’s hope for them, it’s in the finding that most millennials hope to buy a home at some point. I like that because I always say the foundation of financial independence (our kind, that is) is a paid-for home. But even among those who already own a home, 32% got parental help rustling up the down payment. Among those who don’t, a quarter of them (24%) expect their parents to help them with the down payment.

Some millennials do have their act together

I don’t mean to disparage millennials’ aspirations for Financial Independence altogether. Read on our sister site how two millennials aim to be mortgage and debt free in their early 30s. Both of them know all about frugality, saving and deferring instant gratification. Of course they both read the book featured on this web site!

I also suggest reading a guest blog posted on our sister site earlier this week on why millennials should be planning NOT for retirement, but for Financial Independence. The true kind, that is!

Some Christmas book suggestions

rob_carrickparents12Parents who have yet to kick the little birdies out of the nest might consider giving them a hint about what true Financial Independence entails by investing US$2.99 or C$3.37 in either of these e-books. Might make a great stocking stuffer! (Just gift the e-book via Amazon and maybe insert in the stocking a card telling them to check their Kindle).

I suggest too that millennials get a copy of Rob Carrick’s book, How Not to Move Back In With Your Parents. As we speak, my own daughter is reading it.

 

 

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