Financial Freedom

I worked for this company for about 10 years. The company had achieved a remarkable marketing objective: they branded financial freedom. Known as Freedom 55, London Life successfully brought to market a new way of thinking about financial security planning. Although James MacKinnon, Professor of Econometrics at Queen’s University here in Kingston, had this blunt assessment of Freedom 55:

Freedom 55 is just not going to be feasible, and I’m not convinced it ever was.

Well, some people do get there.

I follow Financial Freedom is a Journey, a blog that highlights the approach that the author had taken to become financially free.

I retired in May 2016 at the age of 56 after a 34 year career in banking. My wife beat me. She retired in 2015 at the age of 52. Who said life is fair?

I have been a relatively conservative investor for over 30 years. While our passive income pales in comparison to that of Warren Buffett and Charlie Munger at Berkshire Hathaway, our annual dividend income and rental income far exceeds that reported in any other “investing” blog I have read to date; as at February 2017 we generate six figures in passive income.

My observations lead me to believe the lack of money creates unnecessary problems. I have, therefore, created this blog in the hopes of being able to impart some of my experiences over the course of my investment career.

What I love about his blog is that he posts his portfolio and provides a summary of his dividend income as well as his overall portfolio. You can find his current portfolio here.

His reported holdings total about 1 million which is a great outcome for someone who retired at 56. Although he claims to generate six figures in passive income, I only get to about $30k or so from his reported portfolio so he must have other holdings contributing the balance. Producing six figures in passive income requires a portfolio in the 2-3 million dollar range.

He shares some great investing ideas and really does some post some helpful research. His post on Enbridge is an example.

As always, I read these types of blogs to gain perspective. I do not use them to make my own investment decisions for me. That said, there is a lot of really good insight on this particular blog. I hope he continues to post!

Why You Suck At Investing


Bloomberg asks the question: are you as stupid as your financial advisor thinks?

Investors need to be saved from themselves. That’s the conventional wisdom, and there’s some truth to it. Individual investors can have comically bad timing. They buy when stock prices are high. They panic and sell when markets plunge. They invest with the hot mutual fund managers just as the managers’ luck runs out. And what’s their reward? They supposedly underperform the very mutual funds they invest in by some four percentage points a year, or more, according to an annual study by the research firm Dalbar.

Lance Roberts of Real Investments Advice provided his perspective in his post on Dalbar, 2016: Yes, You Still Suck At Investing (Tips For Advisors):

  • In 2015, the average equity mutual fund investor underperformed the S&P 500 by a margin of 3.66%. While the broader market made incremental gains of 1.38%, the average equity investor suffered a more-than-incremental loss of -2.28%.
  • In 2015, the average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by a margin of 3.66%. The broader bond market realized a slight return of 0.55% while the average fixed income fund investor lost -3.11%.
  • In 2015, the 20-year annualized S&P return was 8.19% while the 20-year annualized return for the average equity mutual fund investor was only 4.67%, a gap of 3.52%.

He also points out that:

The biggest reason for underperformance by investors who do participate in the financial markets over time is psychology. Behavioral biases that lead to poor investment decision-making is the single largest contributor to underperformance over time.

Too many investors follow the crowd and too many investors fear losing capital. What was a bit surprising to me is that there are not too many investors. Very few people participate in the stock market. Here’s why:

Unfortunately, between weak economic growth, stagnant incomes, rising costs of living and two major “bear” markets; nearly 80% of Americans simply are not able to participate as shown by numerous studies and statistical facts over the last few years:

  • According to the Pew Research Center, the median income of middle-class households declined by 4 percent from 2000 to 2014.
  • The Pew Research Center has also found that median wealth for middle-class households dropped by an astounding 28 percent between 2001 and 2013.
  • There are still 900,000 fewer middle-class jobs in America than there were when the last recession began, but the population has grown significantly larger since that time.
  • According to the Social Security Administration, 51 percent of all American workers make less than $30,000 a year.
  • An astounding 48.8 percent of all 25-year-old Americans still live at home with their parents.
  • According to the U.S. Census Bureau, 49 percent of all Americans now live in a home that receives money from the government each month, and nearly 47 million Americans are living in poverty right now.
  • In 2007, about one out of every eight children in America was on food stamps. Today, that number is one out of every five.
  • The median net worth of families in the United States was $137, 955 in 2007. Today, it is just $82,756.

Gambling With Your Future


Curious about retirement income? Curious about whether you are financially prepared for that time in life?

The Canadian government completed a comprehensive review of retirement income in 2011. Not surprisingly, most seniors draw income from OAS and CPP. About half of seniors draw income from investments, over 60 percent draw income from pensions and RRSPs and about 20 percent draw income from employment.

The median income for seniors in Canada:

  • OAS: 6,400 for males and 6,400 for females
  • CPP: 7,800 for males and 6,200 for females
  • Investments: 1,200 for males and 1,300 for females
  • Pensions and RRSPs: 16,300 for males and 8,500 for females
  • Employment: 2,200 for males and 3,300 for females

A senior couple would be at roughly $60,000 in income at retirement. Median after-tax income in senior families was $52,300 in 2012 so that number is close enough.

Median family income in Canada was $76,000 in 2013, just as many households earned less than $76,000 as earned more. The richest ten percent made more than $80,400 and the top one percent, all 272,600 of them, made more than $191,000. You can read more about the Canadian Income Survey here.

That gives a pretty good range of estimates for retirement income. Middle income senior households would be in the $40,000 to $70,000 range, upper income seniors in the $70,000 to $100,000 range. Above that would be a very small group of seniors.

For the median, a senior couple would expect to have the government provide $26,800 through OAS and CPP. The balance, $33,200, would have to be funded from pensions and investments. A rough estimate would suggest that investable assets of about $800,000 would be required to produce $33,200 reliably over the retirement years. And, of course, adjusting for inflation would make all of these assumptions higher depending on the planning horizon.

Assuming a 15 percent savings rate for the median family income of $76,000, investing $11,400 at age 35 and making annual additions of $11,400 for 30 years would produce about $800,000 in retirement savings assuming a 5 percent rate of return — and that number would likely be short as the income needs at retirement would be higher due to the impact of inflation.

Hence why a pension can be so very important for most families.

BlackRock recently issued their Global Investor Pulse for Canada. You can download the report here.

Most Canadians expect to require an annual income of $47,000 at retirement — well below the median senior household income of 2011. Four out of ten Canadians have no retirement savings whatsoever. Canadians above 55 years of age have saved a median of $125,000 for retirement enough to produce roughly $5,000 – 6,000 of income and well below what they will need in their retirement years.

And, more telling, half of Canadians believe that investing is on par with gambling and they hold their savings in cash in low interest bearing accounts.

The BlackRock report highlights 5 steps that Canadians can take to raise their financial IQ:

1. Take Ownership

When it comes to financial planning, it’s important to remember that it starts with you. Whether it’s doing it yourself or seeking advice from an expert, you have an important—and active—role in making these decisions, and the most to win or lose based on how you spend, save and invest your money.

2. Get Informed

Before you take action, make sure you know the options available. For example, when it comes to retirement this could include: workplace plans, government options, or individual retirement accounts. Don’t be part of the 50% of Canadians who don’t know how much money they will need to last them through retirement, or the 52% of those with a Defined Contribution or RRSP plan who do not understand what their maximum contribution is to their plan. Seek ways to become better informed.

3. Make a Plan and Stick to It

Sometimes the now gets in the way of planning for the future. Setting goals is the first important step to ensure that you put yourself on track to achieving your objectives, including a comfortable retirement. Most Canadians (64%) agree that they take financial planning seriously. Make sure that you are part of the group that believes in financial planning and also has a plan to make it happen.

4. Seek Advice

Major life events, like preparing for retirement, starting a business or dealing with an inheritance, can have long-term implications for people’s financial wellbeing. Seeking advice can help you get on the right path. Advice can come in many forms and is made easier by technology. Whether through work, a friend, family, online or a nancial advisor, don’t be afraid to seek advice.

5. Start Early

One of the most important steps you can take to have a successful retirement is to start early. We know from this study that most Canadians who invest begin doing so by the time they reach age 35 (68%). The younger you are, the more time you will have to grow your investments. Consider the most often-mentioned piece of advice that Canadians (56%) would give their “younger self” about saving and investing: start saving for retirement from a younger age.

A Retirement of Your Dreams

couple on the beach

From Benjamin Tal’s latest economic update:

While many Canadians, particularly those now close to 65, are on a path to the retirement of their dreams, the data show that millions of others are headed for a steep decline in living standards in the decades ahead, particularly those who are currently younger and who are in middle-income brackets.

Those born during WWII are positioned to maintain virtually all of their pre-retirement consumption patterns: after allowing for the drop in living costs, they have a replacement rate close to 1.0. The leading edge of the baby boom generation (post-WW II, born between 1945-64) that followed is only slightly less advantaged. But their children are much less well positioned, given the current trend towards lower savings rates and reduced private pension coverage. On average, the replacement rate of those born in the 1980s, who will retire towards the middle of this century, will be only 0.7, implying a 30% drop in their standard of living.

He finishes his update with the following statement:

Add it all up, and there are some 5.8 million working age Canadians who will see more than a 20% drop in their living standards upon retirement. That’s why the time to act is now.

Replacement rates are tricky things to determine. Retirement, from a financial planning perspective, is a compromise between needs and wants. Given the progressive taxation system, a high-income earner in Canada requires a lower replacement rate to maintain the same standard of living. And, according to the government’s own research findings, a low-income earner will actually be better off in retirement:

The lower the income in individuals’ mid-fifties, the higher the replacement rate in their senior years. Individuals in the bottom quintile typically achieved a 110% replacement rate by their mid-sixties, while individuals in the top income quintile had replacement rates in the 0.7 range.

If you happen to be in the middle income group and you do not work for the government, sufficient income at retirement might be a challenge.

The Ontario Government published an interesting study on Retirement Income Security. The following chart highlights the potential impact of the gap in income:


If an individual has income of $75,000 before tax, the replacement rate of 0.7 would suggest a retirement income target of $52,500. After CPP and OAS, this individual would face a potential income gap of $33,329. To produce $33,329 reliably would require savings between $670,000 — 835,000 depending on your planning assumptions. Now, if you had a pension plan, that would likely offset most of the gap. But what if you did not need to replace 70 percent of your working income?

Malcolm Hamilton is a pension expert and he thinks that the 0.7 replacement rate is too high.

Canadians don’t need to “replace” 70 or 80% of their working incomes, which are the percentages usually proffered by our financial institutions. Most of us will be able to get by with 50% or even just 40% of what we earned in our working lives. “No one can tell exactly how much we will need to save. Canadians are unduly and irrationally discouraged about their prospects.”

He also provides an example:

A typical Toronto couple with two incomes totalling $120,000 a year probably spend $480,000 on a modest house and have two kids. If they save five times their gross earnings and accumulate $600,000 in capital, they could replace 52% of their income in retirement. To get there, they’d simply need to save 6% of their income between ages 25 and 65, at which point they could retire. They would direct 23% of earnings to taxes, CPP and EI, and another 23% to pay for the house and kids. In all, 52% of their gross working income goes to taxes, savings, the house and children. At 65, all those expenditures disappear. The $600,000 capital will replace 20% of the income they were earning in their working lives, and CPP and OAS will generate 32%, for a total 52% replacement ratio. That will allow them to spend as much on themselves as they did when they were working.

Should we be saving for retirement? Of course. Do you need a high replacement rate? Probably not. Particularly if you are a high income earner. And, if you look at your current expenses, how much do you spend on taxes, CPP, EI and the house and kids? If you have a pension, you may not need to save much at all if you plan to work to 65.

I like Hamilton’s perspective. We should be optimistic about our prospects.

The Money Test


I received an email from David Bach, author of Smart Couples Finish Rich. There is a Canadian version of the book here.

David joined up with Edelman Financial Services in 2014 and continues to work extensively in the financial planning realm. David is holding a set of seminars on retirement planning in the United States and he recently sent me an email invitation to attend.

David also included a true-false quiz in his email. He suggested in his email that both me and my partner should take the quiz. I have modified a few of his questions below to make it a bit more Canadian. And I have provided my own answers. I’ve guessed Lorraine’s answer.

I know our current net worth (i.e. the values of the assets we have minus the liabilities we owe).

True. And, to be a bit more obsessive compulsive, I have a spreadsheet which has a 15-year view. Our net worth for the past five years and our forecast for the next ten.

Lorraine: True. She has no choice because I like to share this amazing spreadsheet with her every week or so.

I have a solid grasp of what our fixed monthly overhead is, including property taxes and all forms of insurance.

True. I maintain a budget spreadsheet which also keeps the prior five years of expenses and projects out the next five years. I update the current year’s data every week or two and I compare actual to forecast.

Lorraine: True.

I know how my partner feels about our monthly overhead. We have discussed both the size and nature of our regular expenses and obligations and are comfortable with them.

True. Although one can never have enough guitars.

Lorraine: True but one can have way too many guitars. And guitar pedals. And guitar amps.

I know how much life insurance my partner and I carry. I know exactly what the death benefits are, how much cash value there is in our policies (if any) and what rate the money is earning (if applicable).


Lorraine: True.

I have reviewed our life insurance policies sometime in the last 12 to 24 months, and I am comfortable that we are paying a competitive rate in today’s insurance market.

True. Although I have only made changes to my insurance coverage in 10-year intervals (age 30, age 40, age 50 and soon, age 60).

Lorraine: False. I’m not sure that Lorraine has looked at our life insurance policies in the last two years. I could be wrong on that front though.

I know the current value of our home, the current equity we have in our home, the size of our mortgage, the interest rate on the mortgage, if the rate is competitive based on today’s rates, the type of mortgage rate (fixed or adjustable), and if it is an adjustable rate–the date on which it adjusts.

True. By fluke however on the current value. We have a friend in the real estate business who was kind enough to provide an appraisal for our home. I maintained a forecast of appreciation for the house based on our purchase price with a rate of growth of 2% per year. Our real estate agent’s evaluation placed the house with a rate of growth of 3% per year. I plan around the lower number. Why? Because our home is where we live. It is not an investment that I would use unless I sold it. If I sell it, I need to factor in all of the closing costs. The 2% rate of growth seems appropriate and, if we have a correction in residential real estate, even 2% will seem too optimistic.

Lorraine: True. Our friend in the real estate business is really Lorraine’s friend.

I know what type of homeowner’s or renter’s insurance we have and what the deductibles are. I know whether or not our policy would provide us with ‘today’s replacement cost’ or actual cash value, if our home and/or property were destroyed or stolen.

True. Largely because we have to fight the insurance company every year. It is not unusual for our house insurance premium to jump 30 – 50 percent year over year. We call to complain about the increase and we always seem to get a sharply reduced renewal rate.

Lorraine: True as she makes the call to the insurance company every year.

I know the nature and size of all our investments (including cash, checking accounts, savings accounts, money-market accounts, CD’s, treasury bills, savings bonds, mutual funds, annuities, stocks and bonds, real estate investments and collectibles such as stamps, coins, artwork, etc.). I also know where all the relevant paperwork is kept.

True. I have to because I am a DIY investor. I maintain all of my portfolio accounts online and, despite my best intentions, I mark to market every trading day. If I am happy it is because the markets are up and, if I am not happy, well you can guess which way they market is going.

Lorraine: True although she doesn’t mark to market every day. Or every week. Or even every month. And that is why she is always happy.

I know the annualized returns of all the above-mentioned investments.

True. I forecast a 6 percent rate of return on our investments. Fortunately the overall portfolio has outperformed my planning number. Better to be conservative though. I also have my own Investment Policy Statement which outlines my risk tolerance and my investment objectives. This helps me to be an investor for the long term and not a gambler.

Lorraine: True because I like to show her my investment chops particularly during periods when the markets are up.

I know the current value of all our retirement accounts (including LIRAs, TFSAs, RRSPs, company pension plans, etc.). I know where the statements for these accounts are kept and I have a solid grasp of how all our accounts performed last year.

True. All of our retirement accounts are online. Statements for things like pension plans are digitized and archived.

Lorraine: True.

I know what percentage of our income we are saving as a couple.

True. I calculate a series of financial ratios for our household including:

  • Gross Debt Service Ratio
  • Total Debt Service Ratio
  • Liquidity Ratio
  • Solvency Ratio
  • Annual Savings Ratio
  • Debt Payment to Income Ratio
  • Total Savings to Income Ratio
  • Total Debt to Gross Income Ratio
  • Total Debt to After-tax Income Ratio
  • Total Assets to Income Ratio

And I have targets for each of the ratios.

Lorraine: False. I do all of that geeky financial planning stuff and I don’t typically review the ratios with Lorraine.

I know how much each of us is putting into our respective retirement accounts, whether that amounts to the maximum allowable contributions and what our respective vesting schedules are.

True. I call this our “Freedom Account”

Lorraine: True.

I know how much money each of us will be getting from the Canada Pension Plan when we retire and what our pension benefits (if any) will be.

True. I have a spreadsheet which estimates my retirement income from all sources through to age 65 should I be working that long. If I retire early, the retirement income projection shows the estimate for any age between 2016 and 2022.

Lorraine: True.

I know whether or not we have a will or living trust, what its provisions are and how up-to-date it is.

True. Lorraine and I updated our wills a few years ago after my mother’s death.

Lorraine: True.

I know whether our income would be protected by disability insurance should I or my partner become unable to work. If we do have disability insurance, I know the amount of coverage, when the benefits would start and whether they would be taxable. If we don’t have disability insurance, I know why we don’t have it.

True. I have disability insurance through my employer.

Lorraine: False. My fault really as I don’t think I have ever gone through this with Lorraine.

I know what my partner’s wishes are regarding medical treatment (including being kept alive by artificial means) in the event he or she falls seriously ill or is seriously injured. I know whether or not our will includes a valid power of attorney covering such situations. I also know how my partner feels about being an organ donor.

False. I need to talk about this with Lorraine.

Lorraine: False.

I know if my partner has taken an investment class in recent years.

True. Lorraine has not although she has read some of my investing books.

Lorraine: True as I constantly read books about investing.

I know how my partner’s parents handled their finances and I know what effect that has had on how my partner feels about how we manage our money.

False. I have no idea how our parents managed their finances.

Lorraine: False.

So, there you have it. Not a bad set of questions to work through with your spouse. And it may provoke some thinking about financial planning.

Interest Rate Shocker

Well, well, well. The Bank of Canada did something shocking this morning: they cut interest rates!

The price of oil will certainly prove to be negative for growth and underlying inflation in Canada despite the cheap price of gas at the pumps. It seems that this move, unexpected by the market, is being introduced in an attempt to protect highly indebted Canadian households.

The banks will probably move to lower their rates on mortgages and other loans although the last thing most households should be doing right now is adding on more debt.

I can see the Canadian dollar falling to 80 cents or lower. Overall inflation may drop under 75 bps, dangerously close to disinflation. 2015 will be a challenging year for Canada from an economic perspective:

The oil price shock increases both downside risks to the inflation profile and financial stability risks. The Bank’s policy action is intended to provide insurance against these risks, support the sectoral adjustment needed to strengthen investment and growth, and bring the Canadian economy back to full capacity and inflation to target within the projection horizon.

That projected horizon to full capacity is now the end of 2016. The Bank of Canada press release can be found here.

I guess lower interest rates are here for a bit longer. But really, building out the economy on real estate speculation, consumer debt and resource extraction is risky.

Here’s hoping the Bank of Canada can right the ship.

Shockingly Poor

Average Investor

The performance of the typical investor is shockingly poor. This according to Richard Bernstein Advisors (pdf here):

The average investor has underperformed every category except Asian emerging market and Japanese equities. The average investor even underperformed cash (listed here as 3-month t-bills)! The average investor underperformed nearly every asset class. They could have improved performance by simply buying and holding any asset class other than Asian emerging market or Japanese equities. Thus, their underperformance suggests investors’ timing of asset allocation decisions must have been particularly poor, i.e., investors consistently bought assets that were overvalued and sold assets that were undervalued. They bought high and sold low. When chaos occurred, investors ran away.

Warren Buffett provides an appropriate strategy for the average investor:

Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers. 

This provides a bit more context for Warren’s comments:

The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.

That’s the “what” of investing for the non-professional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur… The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long- term results than the knowledgeable professional who is blind to even a single weakness.

If “investors” frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.

Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.

Warren’s letter to his shareholders, which includes the above comments from page 20, can be downloaded as a pdf here.

High Income Trends in Canada

Let’s take a look at those folks in the very top of income in Canada. The top one percent of income earners has been highlighted repeatedly by the media over the past few years and it always brings a refreshing perspective on so-called income inequality.

I long ago recognized that in a capitalist system, the market is willing to pay people at different levels. I never viewed my income as an indicator of inequality. Rather, it was an indicator of the relative value of my labour as dictated by the market. If I wanted to make more money, I needed to find ways to increase the relative value of my labour. And that is not very easy to achieve particularly in a highly competitive marketplace. I also learned that there would always be a very small and a very elite group that would be truly wealthy. And the marker of being truly wealthy has very little to do with the relative value of labour.

Well, with all of that preamble out of the way, what did the government statisticians find when they prowled through the income data of high-income earners over the past few decades?

There are not very many high income earners in Canada. Out of 25.5 million tax filers, only 254,700 break into the top one percent of income. And to get there in 2010, they needed an annual income of $201,400 or higher. These folks also accounted for 10.6% of Canada’s total income in 2010.

A bit different in the United States. 1.4 million Americans made 16.9% of the United States total income in 2010 and they needed an annual income of $369,691 or higher in 2010 to break into the top one percent.

The median income of the top one percent of filers in Canada was $283,000. If you made more than $283,000 you were in the top .5 percent.

The top one percent in Canada paid 21.2% of federal and provincial taxes. The top one percent redistribute their earnings at a more progressive level than any other income level.

Most high income earners are male. Women represent only 21% of high income earners in Canada.

The report goes on to highlight other details and if you are interested you can follow the link above or go to it here.

High income is not a reflection of wealth. Assets matter far more.

Consider the following perspective on high income earners in the United States:

Until recently, most studies just broke out the top 1% as a group. Data on net worth distributions within the top 1% indicate that one enters the top 0.5% with about $1.8M, the top 0.25% with $3.1M, the top 0.10% with $5.5M and the top 0.01% with $24.4M. Wealth distribution is highly skewed towards the top 0.01%, increasing the overall average for this group. The net worth for those in the lower half of the top 1% is usually achieved after decades of education, hard work, saving and investing as a professional or small business person. While an after-tax income of $175k to $250k and net worth in the $1.2M to $1.8M range may seem like a lot of money to most Americans, it doesn’t really buy freedom from financial worry or access to the true corridors of power and money. That doesn’t become frequent until we reach the top 0.1%.

Yes, that very top 0.1% is quite a different world.