Thursday 26 May 2011

Managing Financial Effects of Health in Retirement: 2) Narrowing Your Own Chances of Problems

The figures in the previous post on health problems that could happen and their likelihood are averages for the population. Everybody's individual chances will be different partly based on genetics – ask yourself how many in your family have had the various ailments – and partly based on your lifestyle actions. You can tilt the odds in your own favour. The same kinds of factors that the life expectancy calculators use to estimate your lifespan will greatly influence your health while alive.
  1. Diet – Eat fruits and vegetables. Eat foods with Omega-3 Fatty Acids (helps avoid Alzheimer's apparently). Eat fish and shellfish. Limit salt, caffeine (over 3 cups of coffee per day starts to do damage), high cholesterol and fatty foods. Drink some alcohol – 1 to 2 drinks per day – but taking more is to your detriment. Warning sign - being overweight, or even worse, obese with a Body Mass Index over 30. Oh, and remember to floss as it might keep a heart attack away, according to the lifespan calculator.

  2. Smoking – It's bad, there is no dividing line or upside. Smoking raises chances of cancer and stroke.

  3. Friends and Family – Having regular social contacts, loving and being loved, obviously will improve emotional satisfaction with life but there is a spillover into physical health too. Keeping a pet dog or cat falls into this category as well.

  4. Exercise – Nature-walking, mall-walking, golf, curling, tennis, treadmill, skiing, ballroom dancing, weights and, why not, sex. Take your pick, anything that requires muscle use, gets you moving, breathing a bit hard and the heart rate up helps bring about healthy life.

  5. Brain Activity – Your brain is like your muscles. It needs regular workouts to stay in shape. Keeping your mind active can delay or avoid the onset of dementia. Reading books, blogs, magazines and better, trying to figure something out or learn something about whatever is of interest to you, will benefit your brain. Doing some sort of work, paid or volunteer, where there is responsibility and a sense of achievement, however small in the grand scheme of things, does wonders for the mind. It can also be a good social activity. On-going brain exercise may be a reason people with higher levels of education have lower incidence of dementia.

You can reduce health risks but the fact remains that you cannot eliminate them.

The next post in this series will look at the range of financial consequences of the various types of health problems, i.e. if you get cancer, have a stroke, or get Alzheimer's, what will it cost?

Wednesday 18 May 2011

Managing Financial Effects of Health in Retirement: 1) What can happen and what are the odds?

"Odds are you don't know what the odds are."
Gary Belsky and Thomas Gilovich, Why Smart People Make Big Money Mistakes

Health is a big concern to most people as they get older. The image of a decrepit, half-deaf, frail, confused person immobile in a wheel chair haunts us all. Such a prospect is scary, not only for the feeling that life will be joyless and empty but also for the financial implications. Will costs of care bankrupt us? Will we become a resented burden on family? Are financial products that can provide protection like critical illness insurance and long term care (LTC) insurance necessary or worth the cost? How should we go about deciding whether to buy them and what are the alternatives?

Most Seniors Will be Healthy During Old Age and Never Need Long Term Care
This is the encouraging news. People do not get to 65 or whatever retirement age and suddenly become wheelchair cases unable to take care of themselves. In fact, the 2011 OECD report Help Wanted? Providing and Paying for Long-Term Care contains a chart showing that only 2% of the Canadian population as of 2007 was receiving LTC. Most of them are women over 80.

In another study (in the Eight Conference on Health Survey Research Methods), Michael Wolfson and Geoff Rowe of Statistics Canada projected levels of disability in Canada for the year 2021. In the chart below, presented by Wolfson using that data in Projecting the Adequacy of Canadians' Retirement Incomes, the predominant light grey area in the centre is the population with no disability at all and the next area outwards from the middle are those with mild disability, moving through ever darker bands of moderate to severe disability to institutionalized. Note that at every age group moving upwards the vast majority of men and women will be generally healthy and able to enjoy life, even for people in their 80s and 90s. Even in the 90+ age group, only 43% are likely, according to this projection, find themselves moderately or worse disabled.

There is a very gradual increase in the amount of disability with age, but no sudden abyss of decrepitude. There is an increase nevertheless.

The Big 4 Old Age Health Problems
The things that will hurt most, both physically and financially, are:
  • Cancer – the biggie at 65, around double the rate of any other problem, hits 8.5% of women, 14.2% of men age 65

  • Heart attack and Bypass surgery – affects men more than twice as much as women

  • Stroke – tends to have long term consequences since 75% survive a first stroke and 60% are left with a disability according to citing the Heart and Stroke Foundation

  • Dementia (including Alzheimer's) – much more a woman's disease, it is already significant at 65, rises with age and really spikes upwards in older age, affecting 35% of those over 85. With people living longer and medical advances controlling chronic diseases better, dementia will become an ever greater issue for the Baby Boom generation. The 2010 report commissioned by the Alzheimer Society, Rising Tide: The Impact of Dementia in Canada, projects that the number of people living with dementia will rise from 1.5% of the population in 2008 to 2.8% in 2038. Of course, almost all of that increase will be amongst older people. The following graph from the report shows the huge spike upwards from age 80 that is expected to occur.

The next post will mention a few of the actions we can all take to reduce those odds to live healthier longer. After that, it's on to the the financial consequences of ill health during retirement and then the options for dealing with the financial risk, like various forms of insurance and whether they are worth it. Meantime, where the heck is the darn dental floss?

Tuesday 17 May 2011

Working after Retirement Not a Government Conspiracy

Those who observe the recent changes to the Canada Pension Plan rules which punish early retirement and reward later retirement, can be misled into thinking that the idea of working in retirement is somehow a bad thing, that it is a negation of the luxury of complete leisure that we have worked for throughout our lives.

Well, it ain't so. From a purely selfish point of view, working as long as you can is a good thing, even ignoring the money it can provide. We humans are happier and physically and mentally healthier when working.

Within Michael Wolfson's Projecting the Adequacy of Canadians' Retirement Incomes is the following table. Isn't it interesting that when people who are actually over 65 were asked the question what gave them the most satisfaction, work came out on top! That's right - ahead of all those activities people supposedly look forward to doing, like volunteering, dining out, clubs. Now some activities are curiously missing from the questions, such as travel and ahem, intimate activities, but it still confirms what I said before here and here about the merits of working in retirement.

Reading across the table, we can see that over 65s even enjoy work more than any other age group. Perhaps that has a lot to do with the fact that many people in retirement get the freedom and flexibility to do work they like and the hours they like.

It is certainly not all just working for the fun of it though. As Jonathan Chevreau's recent Financial Post article Full retirement a thing of the past noted, a good portion of working retirees need the money too.

Whatever way you slice it, working in retirement is good.

Wednesday 11 May 2011

Bank Research Views on Inflation, Future Rates of Return and TSX Profits

Grist for the planning / expectations mill:
  • Inflation - BMO Capital Markets Economic Research in the May 6 Focus on pages 5-6 weighs up likely changes to the Bank of Canada inflation targeting mechanism and 2% target and concludes that for now it will all remain the same, though in few years the BOC might move to a lower target since "CPI provides an upward biased measure of the true cost of living (because people tend to substitute lower- for higher-priced items and many new tech-type goods exhibit significant price decay)".
  • Future rates of return - TD Financial Group Economics in the March 17th An Economics Perspective On Long-Term Financial Returns estimates that a long term investor with a diversified portfolio could expect 5 to 7% returns (before inflation, which they estimate at around 2%) on average, with big swings above and below that year by year as the usual result of business and market cycles. The breakdown: T-bills 3.4%, Universe (whole of market) Bonds 4.0%, Canadian/US/International Developed Equities 7.5%. Emerging markets equities get a one-line comment - "the MSCI Emerging Market Index could deliver an annual return of 11% to 12%"
  • TSX profit margins - CIBC World Markets in the April 29th TSX Earnings: At the Margin figures that profit margins of companies on the TSX look strong overall in relation to the S&P 500 and their rising trend has some potential to advance yet more. Sectors differ considerably however, with a range of hot 20+% margins in metals and mining at the top of the table to woeful 2% margins in airlines and in machinery.

Tuesday 10 May 2011

Canadian Pension Fund Asset Mix Evolution - Ideas for the Individual?

The Pension Investment Association of Canada has a fascinating pull-down on its Publications page here that brings up the composite asset mix of its Canadian pension fund members for any year from 1990 to 2010. I've used it to compare the evolution from 1990 to 2000 to 2010. It tells an interesting story.

The Table
An asset class that wasn't there at all in the previous ten-years-ago period, or which has gone up, is shown in green while those going down are in yellow.

Fixed Income & Cash Down
  • from over 60% of the total mix, these two asset classes together now occupy less than a third of the portfolio; in fact, with a negative cash balance, it looks like pension funds are actually using borrowed funds aka leverage
  • is this because the pressure is on to gain higher returns now that the 20-year stock market boom of the 1980s and 1990s is long gone?
  • mortgages are passé, real return bonds and foreign bonds have replaced them
Equities Up, then Down with the Ascendancy of Non-Traditional Assets
  • hedge funds, private equity, infrastructure investments and other esoteric stuff are the new direction (fad?)
Real Estate Love-in Keeps Growing
  • the pension funds are now almost 10% in real estate; we can be comforted when we go shopping knowing that we are helping fund someone's pension, quite likely our own (even when in Scotland as I am a lot, where the CPPIB has half ownership of Silverburn near Glasgow ... note to fellow Canadians, it seems to busy all the time!)
Inflation-Protection Assets (Real Estate, Infrastructure, Real Return Bonds) Growing Too
  • we've had 15 years of 2% inflation so why would pension keep moving in that direction? ... I would guess because increasing longevity makes the long-term cumulative ravages of "low" 2% inflation a big factor for funds that aim to maintain their member retirees' standard of living
Foreign Equities Almost Double Canadian
  • probably that's due to the small overall size of the Canadian investing pond and the vast amounts of capital the pension funds need to deploy, along with the goal of diversification and the possible attractive returns in new markets, plus perhaps the fact that it is easier and easier to be a global investor
Ways to Apply this to an Individual Portfolio
  • Doug Cronk of the Institutional Investing for Individual Investors blog, who works for a pension fund and on whose site I found the link to the PIAC site, recommends an example portfolio, show here. It's missing real return bonds, available in ETFs such as ZRR and XRR or directly as individual bonds, also doesn't have any extra infrastructure per se (it is already within equities to some extent) and is much heavier on equities, but it is a good start.
  • Another view, from my other blog HowToInvestOnline, is How to Invest for Retirement Like a Pension Fund by Using ETFs, which suggests an ETF line-up modeled on the three biggest pension funds in Canada - the CPPIB, Ontario Teachers' Pension Plan and Ontario Municipal Employees Pension System.

Thursday 5 May 2011

Who Controls Financial Markets in Canada? Individual vs Institutional Investors

Have you ever been annoyed at those breathless news reports on market moves? You know what they are - "investors today have been spooked/cheered by the quarterly inflation figures / credit crisis in Greece / nuclear incident / trade figures / royal wedding / hurricane / terrorist killing" etc (in fact, often it seems that the person writing the text merely attaches the market result, whatever it is, to the current headline news item of the day, good or bad. For those who believe that markets are random, the random association of events to ups and downs makes a certain sense I suppose.)

Anyhow, on reading these news reports, I find myself muttering that it wasn't me, I didn't do it! I have a portfolio apportioned amongst fixed percentages of various passive ETFs and I only trade when rebalancing, taking money out, or buying more. Even when I do trade, my amounts are so puny and I almost always place orders at market price, it cannot make a jot of difference to move markets up or down.

So who does have enough heft in the market to influence things, individual or institutional investors? Are there a few super-rich individual investors with enough money to manipulate things, or is it the mass of ordinary Canadians? Are the mainstream mutual funds the heavyweights or is it the pension funds? It seems to be really difficult to find out through simple Googling but here is what I found out, with admitted uncertainty through some of the guesstimation I've had to do. This is all 2009 data, which seems to be the most common recent data available. The grand total of financial assets in 2009 was $1713.3 billion. Here is the breakdown of who more or less controls or decides how to invest the money (as opposed to who it may belong to or for whose benefit it is being invested).

1) Pension Funds - $898.1 billion 52% share
This is only the top 102 funds - the 100 biggest from the Benefits Canada 2010 report plus the two biggest funds of all in Canada, the Caisse de dépôt et placement du Québec ($131.6 billion in net assets) and the Canada Pension Plan Investment Board ($105.5 billion). Interesting fact - these two plus the top 10 of the Benefits Canada list are all government or public servant plans and together they control about 1/3 of total financial assets in Canada. Reminds one of an old joke ... "what is the difference between capitalism and communism? ... capitalism is the exploitation of man by man while communism is the reverse".

2) Mutual Funds - $595.2 billion, 35% share
(source IFIC reports)

3) The Mega-Rich $140 billion and the Quite Rich guesstimate. $40 billion, combined 11% share
The Mega-Rich cutoff in 2009 was $1 billion for the 55 richest Canadians (see Wikipedia List of Canadians by net worth). For the Quite Rich I had to guess that the next 100, down to about $200 million in assets, might hold around $40 billion in total at an average $400 million each.

4) The Hoi Polloi (that's you and me the retail investor) - $40 billion, 2% share
I'm being optimistic here I think, assigning an average $1200 in directly held investments of stocks, bonds and ETFs (i.e. not owned within pensions or mutual funds) or so to each of the remaining 33 million Canadians. For comparison, consider that the total market value of Canadian ETFs in 2009 was $33.7 billion according to TMX Money.

Let's put a personal face on it. Today when the TSX go down or up we can point the finger at Michael Sabia (Caisse CEO), David Denison (CPPIB) or maybe Jim Leech (OTPP). One thing for sure, it wasn't me.

PS came across figures for the USA ... John Bogle said in the Wall Street Journal in Jan. 2010 that insititutional investors control 70% of US shares, with mutual funds 26%, private pension plans 11% and government pension plans 9%.

Tuesday 3 May 2011

Conservative Election Majority: Three Implications for Personal Finance & Investing

Yesterday's election results gave the Conservatives a majority. My take on three things that will (not) happen as a result:
  • CPP expansion is dead in the water. Pension "reform" will take the form of the PRPPs. The parliamentary majority that takes the pressure off, combined with the justification provided by opposition of some Provinces, and by "there is no problem" deniers allows the Government to say to the official opposition NDP that more urgent matters concern Canadians. Besides, the problem is not a pressing volatile crisis and will only manifest itself gradually.
  • Banks, insurance companies and financial companies are back on the profits bandwagon. They who benefit from the pension savings flows can rest easy and go back to making steady money. Some of these outfits, where the managers do not take all the money for themselves, will be good investments for individual investors. Corporate tax cuts will help too. (Disclosure: I own some shares directly & ETFs with those shares ... who doesn't in one way or another?)
  • TFSA doubling promises and other deficit-dependent promises won't happen (see several mentioned by Michael James). With a majority, the Conservatives are likely to relax and the economy / financial conditions are not likely to force its hand on deficit-elimination like it did during the (in)famous 1990s when Chretien and Martin did the job that has made Canada's fiscal life good since then. The bureaucrats are more likely to convince the Conservatives those measures would be too expensive anyhow.

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