Book Review: Money Logic by Moshe Milevsky

York University finance professor Moshe Milevsky (with co-author Michael Posner) takes us through a series of investment issues in this very worthwhile book, valuable both for its impeccable logic debunking certain common misconceptions and for its informal, readable, common sense approach to providing the explanations. The focus is on principles not on assessment of specific products from individual companies. That is not to say the analysis he presents to the reader is general and not actionable. On the contrary, Milevsky gives us the tools to make our own decision about the topics he covers.

The list of topics includes:

• assessing mutual fund performance
• dollar cost averaging as an investment approach
• the value of segregated mutual funds
• the whys of international diversification
• index-linked GICs
• how to do-it-yourself to get the same benefit as offered by index-linked GICs
• the mortgage paydown vs RRSP invest decision
• asset allocation in retirement - how much equity vs fixed income and why
• after the RRSP years - RRIFs vs annuities
• general discussion of risk or uncertainty in making future decisions and how to factor it in

For each of these topics, Milevsky first explains the nature of the product or issue, with analogies and simple examples, then he brings to bear the logic and the results of research (sparing us the details of the math or the computer models used) to draw out the conclusions or principles. His constant reference to probabilities makes us understand how many of the decisions depend on certain circumstances. For instance, in the annuities vs RRIF chapter, he uses life expectancy statistics to show how the benefit rises progressively (and differently for men and for women due to the longer life expectancy of women) the later the purchase of the annuity is made. His conclusion does not waffle however: "... it therefore makes very little sense in my judgment to convert an RRSP to a life annuity at age 69. The odds say that it makes more sense to wait." Hint: it's age 75 for men and 80 for women. There is also a handy short summary at the end of each chapter.

Though not revised since its publication in 1999, there is little feeling of it being dated. In some cases, like the admonition to us to diversify internationally, it has become more relevant, since the federal government has since removed the RRSP foreign content limit, advocated by Milevsky in the book.

Many people could benefit from reading this book and understanding and accepting some basic conclusions that still rage on as debates in the blogosphere. For instance, dollar cost averaging as an investment approach is stupid because it lowers investment returns, though regular automatic savings that are invested make a lot of sense because most people don't save. In other words, if you have a lump sum available from a lottery win, don't wait to invest it for reasons of dollar cost averaging. If you want to see why, buy Milevsky's book or borrow it from the library. Another topic of this sort is the RRSP vs mortgage payment debate (see here at MillionDollarJourney for example). Hint: There is only one factor to consider - anyone want to guess what it is? ;-)

In short, get the book and read it, it's only 200 big print pages and won't put you to sleep. Five out of five stars.

Buy this book at
chapters.indigo.ca

Book Review: Buying Time by Daryl Diamond

The "buying time" title refers to spending more money early in retirement to have fun and not end up with a big pile of money kept aside for fear of running out with regrets for all the things that never got done in retirement. The subtitle of this book describes better what it is about: "Trading your savings for income and lifestyle in your prime retirement years". The author is a professional retirement planner with his own website.

This book has great value in that there are few if any books (or info on the web it seems) that take an integrated, holistic view of retirement financial planning to show how the whole process starts with lifestyle priorities that then drive a number of complementary financial components and actions. There are many books or websites from which one can obtain precise and comprehensive information and guidance on individual elements such as RRSPs/RRIFs, insurance or annuities but none that put it all together. The book covers all the acronyms and keywords at various degrees of depth: RRSP, locked-in RRSP, RRIF, LIF, LRIF, CPP, OAS, pensions, insurance, annuities, probate, wills. estates, trusts, power of attorney, capital gains, dividends, interest, bonds, equities.

I found very useful Diamond's discussion of the critical lifestyle priorities, namely providing sufficient income throughout retirement (i.e. making sure not to run out money), especially considering major health care requirements for critical illness and long term care, and whatever desire there is to pass along wealth to family or friends (i.e. not the taxman). It was also very helpful to read the explanations of insurance and annuities, something I have not yet spent much time learning the ins and outs of.

The book's stated objective to provide introductory, conceptual level treatment is also, for the DIY person, a major limitation. Diamond's constant refrain is: "to work out an actual detailed plan, go see a financial planner". Is it really beyond the capabilities of an interested, reasonably intelligent person who takes the trouble to buy and read such a book, to go ahead on his/her own?

The other important caveat is that the book needs a major quality improvement overhaul and significant updates. Diamond may be a good financial planner but he needs the services of a good editor to improve grammar, sentence construction, explanations, organization/story line, labeling and such. Many times I found myself saying to myself that something was incorrect, only to think about it and figure out that it was just the awkward explanation. The update is needed for important changes that have occurred since the 2003 publication date: new tax rates for dividends, tax brackets, foreign content rules for registered accounts, RRSP maturity (in the brand new federal government budget) and the introduction of variable payout annuities, which are not mentioned at all (and which annuity authority Moshe Milevsky termed a development which has "... the potential to revolutionize retirement financing in Canada." in his paper How to Completely Avoid Outliving Your Money (about which I wrote a post a few weeks ago).

A pet peeve of mine is the short shrift he gives to Exchange Traded Funds, exactly 11 lines of text, while the whole body of his discussion assumes the use of mutual funds for equity holdings.

Among the interesting but puzzling observations Diamond makes is that the first ten years of retirement are the best ones. Now it makes sense that declining health will limit activities as one gets older. But what if I decide to retire in my mid 50s? Does it mean I will be worse off after 65 compared to someone who retires at 65 and begins to enjoy his ten best years? And in financial terms, will I need less from 65 on than someone who starts his retirement at 65?

It would be very beneficial for the updated revise edition to include four or five annotated case studies of a complete financial plan. Certain themes and situations must arise often enough to be relevant to a large portion of the public. With all his experience, Diamond would surely be able to identify them.

In sum, this is a useful but by no means definitive book on the subject of personal financial management in retirement.