Archive for September, 2010

This and That: Buffett, Closed-End Fund IPOs and more…

September 30, 2010


He lives in a modest home, drives a modest car and he is one of the richest men on the planet. Here’s Part 1 of The World’s Greatest Money Maker, a 60-minute show on Warren Buffet’s life and his methods.

  1. In this hard-hitting article in The Globe and Mail, Fabrice Taylor says only suckers invest in a closed-end fund IPO. About 6 percent of the initial capital goes to feed all those bankers, brokers and lawyers and the fun is only just beginning.
  2. With the deadline for taxing income trusts fast approaching, what’s an income investor to do? Investing Thesis finds out some alternatives to finding income after trust conversions.
  3. Steadyhand Fund’s Tom Bradley takes ING Direct to task for misleading advertising of their Streetwise funds.
  4. The Financial Blogger listed some of the perks in being a resident of la belle province.
  5. We can put money into the account but can we take it out? Gail Vaz-Oxlade is surprised by the restrictions on withdrawing money from a RESP.
  6. Larry MacDonald is all praises for a new book titled 10 Things I Wish Someone Had Told Me About Retirement.
  7. Michael James on Money highlights an interesting article that contains colourful quotes from a Q&A with Charlie Munger. If you have an hour or so, you can view the video here.
  8. In Search of Salt urges students to save money by buying used books and taking full advantages of scholarships and bursaries.
  9. DirectBuy charges an initial membership fee of $5,000 plus annual fees. A Canadian Money Forum member debates whether if any savings will be worth the outlay.
  10. Million Dollar Journey featured an interview with the CEO of a private REIT. Private REITs may be less volatile than publicly-traded ones but investors should keep in mind that private REITs have lower liquidity.
  11. Money Smart Blog’s Mike Holman has just published a book on RESPs.

I’m unable to highlight all the articles worth checking out in my weekly round up but you can check them out through my Twitter feed. Thanks for reading and have a great weekend!

Do Retirees Require GMWB Products?

September 28, 2010


In Pensionize Your Nest Egg (my review is available here), authors Moshe Milevsky and Alexandra Macqueen argue that retirees should diversify their income across three product silos: annuities, systematic withdrawal plan (SWP) accounts (that hold traditional stocks and bonds) and guaranteed minimum withdrawal benefit (GMWB) products.

Investors have access to plenty of low-cost products when it comes to annuities and traditional stocks and bonds. But that’s not true of GMWB products such as Manulife’s IncomePlus in existence today. These products have two significant drawbacks: (1) High fees and (2) No inflation protection on the withdrawal benefits.

GMWB products charge annual fees that average 3.5 to 4.1 percent depending on the bells and whistles added to the base model. Most of these products also limit the equity exposure in the fund to 70 to 80 percent. The high fees combined with capped equity exposure reduces the odds of the investment resetting at a higher level than the base. So, investors in GMWBs available today are essentially purchasing an annuity without any inflation protection. A period of sustained high inflation in future can easily eat away the purchasing power of the guaranteed income from a GMWB.

Due to these drawbacks, it should be asked if GMWBs even have a role in a retiree’s portfolio. Wouldn’t a retiree achieve better results from purchasing annuities with a portion of the capital and investing the rest in equities?

Book Review: Pensionize Your Nest Egg

September 27, 2010

[Book Cover of Pensionize Your Nest Egg]

Traditional defined-benefit pensions in which an employer promises and guarantees an employee’s retirement income are becoming scarcer these days. As very few Canadians outside of the public sector being covered by DB plans, the vast majority of us now bear the risk of saving enough for retirement and investing those savings wisely. Unfortunately, the challenge doesn’t end there. Canadians in, or nearing retirement then face risks that their hard-earned nest egg will not last their lifetime.

In Pensionize Your Nest Egg, authors Moshe Milvesky and Alexandra Macqueen demonstrate that retirees face three main risks: (1) Longevity risk — the length of time in retirement, (2) Sequence of Returns Risk — the risk of a negative sequence of returns in the years immediately preceding and following retirement and (3) Inflation Risk — the relentless loss of purchasing power of nominal dollars. But how does one protect against these risks? The authors have coined (and trademarked) a term for the solution: pensionize, which simply refers to converting some fraction of a nest egg into a guaranteed income that lasts a lifetime.

The book is divided into three parts. The first deals with the three aforementioned risks that retirees face. The meat of the book is contained in the second part. It shows why retirees should allocate their retirement accounts across three product silos: annuities, traditional stocks and bonds and guaranteed lifetime withdrawal benefit (GLWB) products (such as Manulife’s IncomePlus). This section also important concepts that retirees need to ponder such as their Retirement Sustainability Quotient and Financial Legacy Value and the trade-offs between them. The last part of the book provides a seven step roadmap for pensionizing a nest egg.

The book is extremely well-written and despite some warnings in the Preface, easy to understand. The discussions are rigorous as you would expect of a book that was co-authored by an academic. Retired Canadians and soon-to-be retirees owe it to themselves to read this book. Pensionize Your Nest Egg is published by John Wiley for a cover price of $26.95. In the spirit of full disclosure, I should mention that a review copy was furnished by Ms. Macqueen and that I know Ms. Macqueen through the Canadian Money Forum where she posts as MoneyGal. You can find  more information on the QWeMA Group website.

Here are some other reactions to the book: Larry MacDonald enjoyed the book and thought it was more accessible and focused than materials presented in other books. Jon Chevreau said the book offers a cure for pension envy in his column in the Financial Post.