For complicated historical reasons, I hold $13,000 in a locked-in RRSP with Great West Life. A few days ago, I received a "Year-End Retirement Illustration", shown over the fold. I read it and thought "That's so bad, it's bloggable."
What's wrong with it?
First, the estimated retirement incomes and investment returns are stated in nominal terms, even though the calculations assume a 2.5 percent inflation rate. A retirement income of $105 to $155 sounds like a pretty good return on my $13,000 - but with 2.5 percent inflation, in 30 years time $105 will only buy as much as $50 buys now. A person trying to answer the question "will I have enough to live on in retirement" needs to know their real returns - that is, how much they can expect to earn in a currency she can understand, like 2013 Canadian dollars.
A second thing wrong with this retirement illustration the way that probabilities are being used. I am told "there is a 90 percent likelihood that you may receive an annual return of 4.45 percent." I have absolutely no idea what that means. Does it mean that there is a 90 percent chance the returns will be 4.45 percent or above? A 90 percent chance of returns of 4.45 percent or above, and a 10 percent chance of me losing everything I've invested in a global financial meltdown? The hypothesis that nominal returns = 4.45 can be accepted with 90% confidence? I suspect this last interpretation is the correct one, but begs the question: what other hypotheses could be accepted with 90% confidence? That returns = 3.0? 2.0? The mean and variance of the distribution of estimated returns would be far more informative than this strange probability calculation.
A third issue I have with these retirement planning scenarios is that they are, to my mind, pure fantasy. There is a 50 percent probability, according to this information, that I may receive a net return of 7.15. Since the plan has management fees of 1.75 percent, this implies a pre-expenses return of 8.9 percent. Right now in the US the 30 year fixed rate mortgage rate is 3.52 percent. Great West Life figures that they have a 50 percent chance of achieving more than twice that rate of return? Seriously?
A lot of fantasies are perfectly benign, like my fantasy of canoing from my house to the Arctic Ocean. Sweet dream, but I know I'll never act upon it. The fantasies of investment planners are more dangerous.
To the extent that statements such as this one overstate the rates of return available through managed fund, they could cause people to misallocate their investments, putting too much in managed funds, and too little in, say, blue-chips in a self-directed RRSP, strip bonds, or other alternative investments (this is not financial advice, I'm not a financial adviser.)
Also, a person who anticipates receiving a 4.5, 6 or 7 percent rate of return on her investments may invest too little, underestimating the amount of money she needs to put aside to meet her retirement needs.
In the end, I just look at statements like the one above and think "I've got a PhD in Economics, and I'm interested in financial literacy and retirement planning. If I'm having problems working out the heck this means, what is the average person supposed to do?"
This is why I have become more and more convinced that programs like Social Security and CPP/QPP are really important. They overset risk due to bad timing, they are predictable, and they don't bear the risk of the financial institution becoming bankrupt (I wonder what the odds are that in 30 years Great West Life could be looted?).
Posted by: Joseph | March 07, 2013 at 06:30 PM
Great post, it neatly encapsulates everything that's wrong with the financial services sector in Canada. A combination of information that is simplistics, confusing and deceptive (often, I suspect, unintentionally so), but at a premium price (1.75% MERs,really?)
I love the line that "there is a 90 percent likelihood that you may receive an annual return of 4.45 percent". Isn't there a 100% likelihood that you MAY receive an annual return of 4.45% (and a 100% likelihood that you may not)? Hell, there's a 100% chance that I may earn a 1000% return, but I wouldn't bet on it. You'd like to think that the authors of that statement are just illiterate (and I wouldn't rule that out), but you can't help but suspect that the use of "likelihood" in conjunction "may" is intended to be deceptive (to give an analogy, and just to prove that I'm not anti-financial advisor, you sometimes see lawyers fudging their opinions by saying that something "likely will" be legal. That sounds fine, but doesn't tell the client whether it WILL be legal or only whether it will LIKELY be legal. There's a big difference between the two).
In any event, a probabalistic statement about future returns is nonsense and shockingly misleading (I'm actually appalled that GWL would publish something like that, it's not like they're some shady fly-by-nigh "advisor"). If you made a statement like that in an offering document, you'd have the OSC on you, notwithstanding the "not guaranteed" disclaimer.
All I will say in defence of the industry (and its a poor defence) is that, in part, the problem is that they have to be simplistic, since large swaths of the public either don't understand or can't be bothered to understand the intricacies of what they're being sold (this is the same reason that political writing is always overly simplistic - they used to tell us to write campaign literature at a grade 9 level, because after a long day at work, people don't have the energy to read anything more complicated). But trying to sell complicated products in simple language will almost certainly result in confusion. It doesn't help that some of the people selling the products are not as smart as they think they are and don't understand what they're selling (i.e., the financial advisors who sold little old ladies ABCP that was "as good as government bonds" despite having an interest rate that was 2 or 3 times higher), while others are little more than used cars salesmen, eager only to make a sale, with litle or no regard for the real interests of their clients (and, I apologize, since that statement is unfair to used car salesmen).
Posted by: Bob Smith | March 07, 2013 at 06:50 PM
Joseph "what the odds are that in 30 years Great West Life could be looted?"
That must be what the unspecified 10% is!
On social security and cpp/qpp - I agree with you - people talk about government waste, but the huge costs of managing all of these private investments is seriously wasteful.
Posted by: Frances Woolley | March 07, 2013 at 06:50 PM
When people look at statements like this what I think they do is try and weigh up how their stash looks versus the median of people looking at similar statements. So many others are faced with similar voodoo rubish so the only thing worth comparing is the $ you have under management now. Even then, the outcome between even quite largely differentiated dollar amounts in a very low rate (and negatie real rate) environment is not as large as it might appear.
The logic being - in the future there will be various lifeboats of different capaacities and "seaworthyness", so what are may chances of being aboard? And of course the answer is that its all relative.
So it doesn't matter one whit what the return is in 15 years time, it matters how one is placed relative to ones peers in the immediate locality (not china or australia but around the local towns and cities) in 15 years. One can safely assume that by taking no significant (aka contrarian) action that one would not be massively disadavantaged with respect to others in 15 years time in this regard.
I'd have to admit that this is how I think about things, because I think you are absolutely right that anything else seems oddly naieve.
Quite possibly, the outcome is that anyone who in 15 years has such statements as in your article as their only recourse will be swept away. Yet, there remains some psychological comfort in the fact that one would be part of a mass drowning, rather than slipping away un-noticed.
Posted by: scepticus | March 07, 2013 at 06:51 PM
"This is why I have become more and more convinced that programs like Social Security and CPP/QPP are really important."
Yeah, but are the assumptions underlying Social Security any more grounded in fact that the ones GWL is making (agreed that CPP/QPP appear to be on more solid footing)? Earlier, I made the comparison between financial literature and political literature, and really, the only difference between that GWL document and the sort of thing you might see in a US election brochure ("You can have social security and medicaid without cutting spending/increasing taxes" - depending on the particular political party that's lying to you) is the forum in which it is published.
Posted by: Bob Smith | March 07, 2013 at 06:56 PM
Preface: I am (almost) a pension actuary. Everything I'm writing below assumes that life insurance actuaries aren't substantially more sophisticated re: economics/investments than pension actuaries are.
Actually, I suspect they meant the first interpretation. When it comes to this kind of forecast the actuarial profession is simplistic (so far as I've observed). I would not be surprised if they just said "mean return is X, stdev of return is Y, returns are lognormally distributed, GO" and took the 10th percentile.
I know that sounds pretty bad, but I'll offer up two excuses:
1. Nobody actually knows what these numbers should be. GIGO. I'm a pretty thorough EMH believer, but I think the uncertainty involved is so large that communicating the idea of uncertainty to the client is much more important than the precise numerical answer.
2. If you approached this question without the idea that markets contain a lot of sophisticated forecasters - if you were trying to guess the distribution of future asset returns based on a purely statistical analysis of prior returns - those kinds of returns are less implausible.
Posted by: Alex Godofsky | March 07, 2013 at 07:59 PM
Alex "I would not be surprised if they just said "mean return is X, stdev of return is Y, returns are lognormally distributed, GO" and took the 10th percentile."
This $13,000 I have in GWL flows from an investment of $3,414 made in Dec 1990. As of Dec, 2000 it was worth 9,254, and now it's $13,000 or so. Looking historically at the rate of return taking 1990 as a starting point then, yes, 4.45 seems like a reasonable rate of return - the average return over the whole period I've been holding this product has been just over 6%. However taking 2000 as a starting point, 4.45 seems wildly overoptimistic- since 2000, this fund has had an average return of 3.2 percent.
The result of the mean return calculation depends critically on the starting point - how do we know what the right starting point is? Perhaps the last five or so years have been typical, and it's the 1990s that were the never-to-be-repeated aberration?
Bob, thanks for that long comment - you're even harder on them than I am!
Perhaps the answer to the "this is to complicated to explain in words" problem is just simply not to explain it in words. Draw pictures. There's lots of graphical tools out there e.g. heatmaps that can be used to convey distributions.
scepticus "So many others are faced with similar voodoo rubish so the only thing worth comparing is the $ you have under management now"
I'm not sure I quite understand your point. People don't share information about their wealth, so how do I know how my $ compare to the $ others have? I don't even know the final worth of some of those in my immediate family.
In a global economy, absolute wealth matters - I want to be able to afford the latest Apple gadgets - iRemember or whatever - when I'm 70.
Posted by: Frances Woolley | March 07, 2013 at 10:10 PM
Great post, it neatly encapsulates everything that's wrong with the financial services sector in Canada. A combination of information that is simplistics, confusing and deceptive (often, I suspect, unintentionally so), but at a premium price (1.75% MERs,really?)
That's par for the course for Great-West Life, they have a reputation of having some of the worst expense ratios in the business. FWIW, GWL is part of Power Financial, Canada's hidden financial conglomerate. Great West Life owns London Life (Freedom 55) and Canada Life directly, they function as one unit for most purposes. Power owns GWL, Investors Group and Mackenzie Financial (the aforementioned terrible funds).
Further, if this was a DC plan originally, it was very likely sold as an insurance contract and not a security. Ontario (and that of most other province's) law states that IF the insurer guarantees a life annuity rate equal to the rate obtainable on enrolment, the investment/annuity package can be sold as insurance rather than an investment. Yes, it is misleading and exemplifies everything that is wrong with the pension industry in Canada, but there it is. The insurance "loophole" is really a guise for not giving any substantive financial advice.
Again, FWIW I believe, and apparently bank presidents also now believe that CPP should become the cornerstone of our retirement system. The employer pension system as we know it needs to die. CPP should have a replacement ratio of at least 50% or have a voluntary component. The rest should be left to RRSP's. DC plans have a very, very real problem providing sufficient and meaningful financial advice and employers don't want DB plans anymore. CPP also takes care of employees who change jobs for whatever reason, it is indifferent to the actual place of work and seniority. Which is a very pro-market feature in my opinion but Corporate Canada eschewed that reasoning for years.
Apparently CPP expansion, actually making it the central retirement pillar instead of private pensions was proposed by Trudeau in his last term as the 1981-82 Recession also caused a pension crisis. However private industry was strongly against the idea and he backed off in favour of "improved private pension provision." Which after three decades, hasn't worked.
Lastly, Frances, given what I said about about GWL fees, my advice is to get rid of this account. Carleton's Pension Plan allows you to do this, they call it an Additional Voluntary Contribution. They will complete Form T2033, send it to GWL and transfer the funds. GWL may have some additional paperwork but this transaction is routine, regular and legal. Carleton has a much lower MER and it would be simpler for you.
Posted by: Determinant | March 07, 2013 at 10:38 PM
Determinant - "DC plans have a very, very real problem providing sufficient and meaningful financial advice and employers don't want DB plans anymore."
I agree with you, and would add that even when DC plans are able to provide the advice, people often lack the skills required to navigate the maze of the financial sector to act upon that advice in an appropriate manner.
"my advice is to get rid of this account. Carleton's Pension Plan allows you to do this, they call it an Additional Voluntary Contribution."
Actually, filling out that form is how I ended up with this account in the first place - this is a joint Great West Life - Carleton University account (I cut that part from the top of the form as I didn't want Carleton's name on the document).
Posted by: Frances Woolley | March 07, 2013 at 11:13 PM
Or we could look back at returns for similar asset mixes in the 80s, 70s, 60s, etc. When you do that it's a lot harder to argue against any specific return assumption being unreasonable (without referring to actual market forecasts).
Posted by: Alex Godofsky | March 07, 2013 at 11:40 PM
Yeesh, I thought Carleton had better service than that (institutional rates.
One could posit that in the beginning (1940's) pensions were defined benefit because payments or benefits was all many workers really understood. Financial management had to be done by the employer as retail investments didn't really exist. DB was the only way.
Today ISTM that employers really just want a current payroll and to make payments to their employees now, they don't want any lingering responsibilities nor any additional burdens, especially future-dated ones. I can live with that, and I'm a lefty. CPP is the way and the employer-sponsored pension system can whither. For voluntary plans, the Saskatchewan Pension Plan sets the standard for simplicity, low cost and communications clarity.
Posted by: Determinant | March 07, 2013 at 11:41 PM
"For voluntary plans, the Saskatchewan Pension Plan sets the standard for simplicity, low cost and communications clarity."
No need to sell me, I've been investing with them for a year now. Too bad they cap the contributions you can make, or I'd invest a bigger chunk of my RRSPs with them.
Part of the concern with expanding the CPP, is that you risk ending up with a very concentrated pool of capital. The CPP has, heretofore, been well managed, but whether that would be a permanent feature is a different question. The practice, for example, of the Caisse being used to advance the economic agenda of the Quebec government (think the proposed Rona takeover) raises serious concerns about expanding the CPP/QPP.
Part of me wonders if the solution isn't to open our capital market up to foreign competition. The contrast between MERs in Canada and MERs in the US is shocking. In part that's a function of the larger size of the US market (there are real economies of scale in this sector), but in part its a function of greater competition (people like Vanguard driving down costs). Both of those are issues that could be addressed by integrating the Canadian and US financial sectors (though I imagine that suggestion might not go over particularly well in the Canadian market).
Posted by: Bob Smith | March 08, 2013 at 12:00 AM
Alex "it's a lot harder to argue against any specific return assumption being unreasonable" - I think this is the difference between risk and uncertainty?
The interesting question is: how should an individual investor respond to the extreme uncertainty about future investment returns? If one is saving out of fear - as I write I have images of the Zambian old folks home I visited while in Africa - uncertainty would I think make one put more aside, but if one is saving to get rich, I don't know.
Bob "The CPP has, heretofore, been well managed" - there's a bit too much in real estate for my taste - but generally I agree with you about management, and also about the temptation it represents to politicians.
"Part of me wonders if the solution isn't to open our capital market up to foreign competition." The parallel between MERs and cell phone rates is interesting. Both are outrageously high. Canadians are often not aware how anomalous our cell phone rates are because they usually don't have unlocked cell phones that they can use internationally by switching over the sim card. They don't know how anomalous our MERs rate d because they don't hold a lot of assets outside the country. Lack of knowledge + plus lack of salience (MERs aren't something most people spend a lot of time thinking about) + a sense that Canada's financial market is uniquely stable and has saved us from bad times in the past + the ability of those who really care to avoid high MERs through managing their own $$ mean there isn't much political pressure for change.
Posted by: Frances Woolley | March 08, 2013 at 07:39 AM
"Lack of knowledge + plus lack of salience (MERs aren't something most people spend a lot of time thinking about) + a sense that Canada's financial market is uniquely stable and has saved us from bad times in the past + the ability of those who really care to avoid high MERs through managing their own $$ mean there isn't much political pressure for change."
I think that's right. A high degree of innumeracy doesn't help either. I suspect many Canadians don't appreciate the implications of high MERs. They think "1.75%, that's a small number, no worries", but I wonder if they'd think the same if the MER number were presented as being 20% of the gain/income on the underlying investment (as in your fictional GWL example). You saw some of that back in 2008/2009, when lots of money market funds had to start waiving their fees, after people realized that the fees were more than the income on the fund, making them worse than just holding cash.
In fairness, and in the Wealthy Barber, David Chilton talks about this, the traditional mutual fund structure was, at a time, a very innovative, client friendly and relatively inexpensive way to allow ordinary Canadians to invest in things other than traditional GICs or CSBs. As an alternative to the traditional brokerage industry, with fees and services tailored to large, wealthy, investors, mutual funds, high MERs and all, were a clever idea. The problem is, it hasn't evolved over time, and there are now enough vested interests in the system,
Posted by: Bob Smith | March 08, 2013 at 09:28 AM
Competition is happening, ING's Streetwise funds have 1.1% MER's with no additional charges whatsoever. I fear what will happen to them with the Scotiabank takeover, but we'll see. Scotia wanted a bigger domestic deposit base and got it, so the transaction made business and regulatory sense that way. On mutual funds, the jury is still out.
I have the good fortune of being in the advanced stages of a federal government recruitment process. If I am hired, I would be eligible for the Public Service Pension Plan (glory be!). I ran the figures the small RRSP investment I would make to bring my savings up to my target replacement rate would be best placed either with the SPP or with ING. ING wins because it has no cap, but I worry about its stability whereas SPP is exceptionally stable and immune to this kind of takeover risk. We really need an equivalent in Ontario, the Trillium Pension Plan.
"Opening up our capital markets to foreign competition" is not a phrase that has much meaning, IMO. There's no structural protection now. Banking yes, chartered retail banking in particular. But there are no regulatory prohibitions on a foreign takeover of mutual fund dealers or brokers and Canadian stockbroking firms have been held by American firms in the past. The same applies to life insurance actually, it's just domestic Canadian insurers bought out most large foreign companies (legitimately, on the open market, with no regulatory intervention or concessions). The big exception is Standard Life, which is and remains Scottish.
In my mind there's the CPP issue can be dealt with through domestic ownership restrictions, the rest of the fund can be invested in foreign assets, which is what happens at present. The concern that CPP would turn into a bigger and just as aggressive Caisse was raised when the Investment Fund was started, so it at this point it seems more like a paper threat than a real one.
Posted by: Determinant | March 08, 2013 at 12:06 PM
A great post, Frances!
I'm horrified at those management fees. To understand how important they are, note that if you've invested for 25 years at 4.45% instead of (4.45% + 1.75%), your investment grows by about 200% instead of 350%; put another way, those MERs reduce your projected savings at retirement by just over 1/3.
(If you want the math, (1+4.45%)^25=2.96969 while (1+4.45%+1.75%)^25 = 4.498968)
For comparison, you can cheaply buy (and hold in your RRSP) an index fund which should have MERs half or less than that. To take one example, you can buy index funds in the form of ETFs with MERs of under 0.3%.
Posted by: Simon Van Norden | March 08, 2013 at 12:52 PM
Forgive me for a gently chiding tone, but just focusing on the financial aspects of retirement investment is hugely different from looking at the actual costs of retirement. Some time ago, I did a great deal of work with DOE on aerodynamics and structure of large wind turbines , which, being naturally curious, brought me to look at trends in electrical utility costs as well as other municipal services. It is quite easy for a family in Berkeley to have a combined utility cost of $6-800 per month, and they're going nowhere but up, perhaps dramatically as the need to replace ageing infrastructure and need to meet more stringent regulations kicks in.
The projections on future utility costs vary widely, but are all very scary as to the amount of investment one would need simply to generate revenue to pay one's bills for power, water, gas (cooking and heating), sewage and garbage. After some analysis, my solution is to start building a home where I am totally off the grid, with my own p.v. panels and solar hot water panels, well and septic system, and pay for it all without financing. Notwithstanding that he who builds his own home has a fool for a contractor, all the systems are in place and working really well, and I hope to be fully finished by the time I retire, when my total costs are a monthly set aside for replacement of storage batteries every 10 years, and contingency repair costs, both amounting to only a few dollars a month.
If I consider the investment capital required to have built the house to provide me with no rent/mortgage payments and essentially zero combined utility costs vs. the amount of capital required to generate return sufficient to pay the equivalent in rent/mortgage and utilities in a major metropolitan area, there is no comparison.
Posted by: JR Hulls | March 08, 2013 at 01:09 PM
Simon "I'm horrified at those management fees."
Welcome to the world of the low-wealth investor. To buy into a low MER fund, one usually needs to be in a self-managed RRSP, and self-managed accounts typically have fixed management fees. I would actually end up paying more in fees in, say, a self-directed fund with an annual management fee is $100 and a MER of 0.75.
Obviously if I was able to merge this fund with my other, not-locked-in funds (may be I can, I haven't bothered to look into this) then I could go a lower fee route, but right now there's nothing in it.
This, by the way, is one reason why the plethora of different tax-advantaged accounts is such a boon for the financial industry - right now I'm managing about 7 different accounts, none of which can, for tax reasons, be merged with any other account. And if each one of these has fees...
Posted by: Frances Woolley | March 08, 2013 at 01:12 PM
That is just the tip of the iceberg. Pension actuaries discount liabilities at a rate adjusted for risk (i.e., the historical return on investments), running against basic financial economic theory! The discount rate *must* be the risk-free rate, implying that you need to hold a lot more assets today if you want to meet future obligations.
The same logic can be used to get a sense of what one should hold today to get a pension of a certain value. You can see it as the upper bound, and if you're willing to accept a likelihood of having a smaller pension, then adjust accordingly.
See Joshua Rauh's work, scary
http://www.stanford.edu/~rauh/
Posted by: Jack P. | March 08, 2013 at 01:38 PM
"The hypothesis that nominal returns = 4.45 can be accepted with 90% confidence? I suspect this last interpretation is the correct one ..."
No way. You have three decreasing nominal return rates associated with increasing probabilities; those are three points selected from a cumulative distribution of nominal return rates. That is, the claim is that Pr(r >= 4.45%) = 90%.
Since the the probabilities are round numbers but the returns are "funny", I would say that what they did was to construct a hypothetical return distribution (good, bad, or hallucinatory, as the case may be) and selected the points at their chosen probabilities.
But of course, the very fact that we are disputing this interpretation proves your point: what an opaque "illustration"!
Posted by: Phil Koop | March 08, 2013 at 02:01 PM
Nitpick:
Frances quoted them as saying "there is a 90 percent likelihood that you may receive an annual return of 4.45 percent"
The wording they actually used is "...there is a 90 per cent likelihood that you may achieve an annual net rate of return of 4.45 per cent..."
That's sounds a bit closer to idea of 10th percentile of the cdf.
I think that's more precise and clearer than Frances'
Posted by: Simon Van Norden | March 08, 2013 at 05:39 PM
Sorry....thought I had deleted that last line...please ignore.
Posted by: Simon Van Norden | March 08, 2013 at 05:40 PM
About MERs and the low-wealth investor....
Looking at my Big-5 Canadian bank, they offer their "house-brand" TSX index fund with a 0.33% MER that I can buy, hold and sell in my RRSP account without annual or transaction fees....and the RRSP account is about enough to buy a pretty nice car (but you really wouldn't want to retire on it.)
At the risk of sounding like an out-of-touch academic ... is that really atypical?
Posted by: Simon Van Norden | March 08, 2013 at 05:49 PM
Simon - to be clear, the RRSP account (as opposed to the fund) has no annual fees associated with it at all, the total amount you hold with this bank is fairly small, and the RRSP is self-directed? You must let me know which bank it is! I looked on the BMO and the Royal Bank websites, and couldn't see such a product advertised, and there isn't one available through my bank - though larger investors and active traders don't pay annual fees.
Jack P - any particular paper of Joshua Rauh's that's worth reading?
Posted by: Frances Woolley | March 08, 2013 at 06:25 PM
Frances: if you are willing to live without the security of a schedule A Canadian bank as your counterparty, you can open a no-fee self-administered RRSP trading acount at Questrade: http://www.questrade.com/pricing/admin_fees.aspx. Questrade also allows you to buy any listed ETF for free (no commission), in any number of units: http://www.questrade.com/pricing/etf.aspx?pid=13-02-00-Qcom-Home-banner-ETFSmall.
Posted by: Phil Koop | March 08, 2013 at 07:00 PM
1.75% management fee made me nearly puke into the keyboard.
0.175% seems to be more appropriate.
My US based 401k account, koma resistant, consisting to 80% of exchange traded stuff, returned some x% raw over the last decade, which was not exactly investor friendly.
x should be 8% nominal, pre tax and inflation, and 4% post both, in the long run.
Thinking how that develops over the next half a century or more, brought me to macro economics : - )
Posted by: genauer | March 08, 2013 at 08:21 PM
1.1% seems to be the lowest achievable in Canada for retail investors, that is in a cash-for-units retail operation, no extra accounts required. That means SPP or ING, both of which are at this level.
SPP has no profit motive for itself, it just hires a few investment managers and some compliance people. It's a cheap operation.
Posted by: Determinant | March 08, 2013 at 08:43 PM
The lowest management fee you can find is 1.1%? How is that possible... In the US you can get accounts with zero overhead above the fund fees, and fund fees below .1% (sic).
Posted by: Jon | March 09, 2013 at 11:06 AM
1. If the assumptions I made, how they calculate this, are correct, we could gratulate you this summer to a round birthday. This number is crucial for all further calculations, how good or more likely bad this deal is.
2. The overall structure of the printout looks a little hasty. Could it be, that they changed the format, what information is displayed and how, in the last 2 years? It would not surprise me. With the excessively low rates all those providers have now a problem. But to look at a prior statement would be very interesting.
3. Looking at capital gains tax in Canada, wiki states that you get taxed with your full income tax on half the earnings, exactly as it was until 2008 in Germany.
For the RRSP it states that it accumulates untaxed, like a 401k, until withdrawn, but then at the full income tax on all the gains, and not just half? Is this correct? The prior 600 $ limit was a joke, and even the 2500 now are very, very low.
I have a good understanding, how these thinks work in the US and Germany, and would be interested to learn a little more, how that works in Canada. I believe, I can also provide people with some ideas, how to calculate their own projections with a reasonable effort.
Posted by: genauer | March 09, 2013 at 12:19 PM
genauer - yup, your calculations are pretty much correct. For more details about the tax treatment of retirement savings in Canada, take a look at this old post http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/02/the-basic-arithmetic-of-rrsps-and-tfsas.html.
Jon - add it to cell phones, beer, gas, cheese, milk, and the long list of other things that are cheaper in the US than Canada. Our health care is a lot less expensive than yours, however, if you're thinking of getting some surgery done!
Phil - I'll check that out, thanks.
Posted by: Frances Woolley | March 09, 2013 at 01:23 PM
Re: Joshua Rauh's work on correctly discounting pension fund liabilities, he's written both journal articles and wide-audience articles.
A good place to start is this short piece:
http://www.milkeninstitute.org/publications/review/2011_1/26-37.mr49.pdf
Posted by: Jack P. | March 09, 2013 at 01:41 PM
Simon,
The TD e-series really are atypical for conventional mutual funds (ETFs are different). But while they're great products, the fact that TD does almost nothing to market them is telling (and, in fact, it was a real pain in the butt to set up my kids resps to invest in them) is telling.
Posted by: Bob Smith | March 09, 2013 at 05:11 PM
Phil,
Indeed people like Questrade (and other discount brokers) have the potential to undermine that status quo. Apart from fee-free purchases of ETFs (iTrade does that too), they also rebate a portion (in effect, any amount above a base) of the service fee that they receive when you hold conventional mutual funds (typically 1% of the NAV of the fund and a big chunk of the MER). The theory being that since they don't really provide much in the way of service, they shouldn't be keeping that fee (though I can't say that their service is less than many financial "advisors" who don't feel any compunction about pocketing the fee).
With the internet and computers, the intermediary role played by financial advisors is a lot less important than it once was. Unfortunately, I think a lot of Canadians lack the financial literacy to appreciate that change.
Posted by: Bob Smith | March 09, 2013 at 06:19 PM
Determinant,
The structural restrictions to foreign competition in Canada's capital markets are much more subtle than that.
So, for example, if you want to invest in a mutual fund (other than an ETF, which I'll come back to) in your RRSP you have to invest in a "mutual fund trust/corporation" as defined in he Income Tax Act, which by definition has to be a Canadian resident entity. So, the entire family of low-cost Vanguard Mutual Funds (which have been a prime driver of low costs in the US) are off the table for Canadian registered investors. Similarly, even if you could invest in the Vanguard funds, they couldn't offer them to you without preparing all new offering documents that comply with Canadian securities law (which documents no one but the lawyer who drafts them will read).
At one time the requirement that a mutual fund trust be a Canadian resident was probably in keeping with the former foreign property restrictions for RRSPs (which were quite explicitly intended to "encourage" investment in the Canadian capital market). But that former policy has been reversed, albeit in a very haphazard manner.
I mentioned ETFs. I can invest in Vanguard ETFs in my RRSPs, despite the fact that they're not "mutual fund trusts" because they're listed on a "designated stock exchange" for tax purposes. But you get a sense of the arbitrary nature of these rules, where one investment can't be held in your RRSP, but an otherwise identical (but listed) investment can. Unfortunately, this is an area which Finance is busy making a hash of.
I shouldn't complain, the lack of foreign competition may be bad for Canadian investors, but it's good for Canada's legal community that serves the Canadian incumbents.
Posted by: Bob Smith | March 09, 2013 at 06:45 PM
Sorry, that should have read "the entire family of low-cost Vanguard MUTUAL FUNDS (other than ETFs)".
Posted by: Bob Smith | March 09, 2013 at 06:47 PM
For the RRSP it states that it accumulates untaxed, like a 401k, until withdrawn, but then at the full income tax on all the gains, and not just half? Is this correct? The prior 600 $ limit was a joke, and even the 2500 now are very, very low.
Those limits were just for the Saskatchewan Pension Plan, and the Sask Gov't put them in to prevent the gov't-sponsored plan from competing with the private sector ("excessively").
RRSP limits are 18% of income up to $22,000 or so, less any employer pension benefits given to you during the year.
RRSP's follow the EET structure: Contributions are tax-deductible (untaxed), untaxed on growth inside the plan and fully taxable as income on withdrawal. Age-related tax credits, income splitting and less income in retirement mean that the effective tax rate on withdrawal is supposed to be lower than at contribution.
Posted by: Determinant | March 09, 2013 at 07:22 PM
@ Bob, Determinant, Frances
thanks a lot of for the detail information.
Needless to say that private German plans are even more archaic.
Frances
This statement looks like that, because it has to.
Just a few more questions:
Did anyone of you attempt to reproduce the calculations presented?
Did anyone of you succeed in doing so?
Frances, when you compare the yields promised with the mortgage rate, are you sure what is in this RRSP?
Isnt that some "balanced", mainly stock portfolio, like the ones shown in
http://www.globefund.greatwestlife.com/gishome/plsql/gwlpsf.process_fr?fr_mode=COMPANY&pi_universe=GWL_GWLIFE&fr_param1=Great-West%20Life%20Assurance%20Co.&iaction=Go
with "Balanced" in them? Did any of you take a look at that stuff, to understand the whole drama before our eyes?
Posted by: genauer | March 10, 2013 at 09:59 AM
The devilish thing here is that we work for forty years and spend 20 to 30 in retirement. This is hard to do. We've lived under an illusion that it was possible because paygo rules and a population boom made it so.
How can the mailings with your Savings plan tell the truth until we're wiling to accept thus?
Posted by: Jon | March 10, 2013 at 02:00 PM
Jon, completely agreed.
Posted by: Frances Woolley | March 10, 2013 at 02:44 PM
The devilish thing here is that we work for forty years and spend 20 to 30 in retirement. This is hard to do. We've lived under an illusion that it was possible because paygo rules and a population boom made it so.
How can the mailings with your Savings plan tell the truth until we're wiling to accept thus?
You lost the argument at the word "PAYGO".
CPP is not Paygo and never was (completely). It definitely isn't now, it fully and stably funded with excess contributions going into the investment fund.
OAS is paygo, always was paygo and will be paygo in the foreseeable future. The raised age limit was unnecessary and gratuitous.
Paygo worries are an American idea imported into Canada and inapplicable due to our different funding structures.
Private pensions in Canada were never paygo, Canada has always used full-funding requirements (equivalent to Dutch rules, for genauer's benefit).
The issue is that individual time in retirement is longer than the expected lifespan of many corporations, converse to the usual assumption. Therefore private benefits should be underwritten by a life insurer which has a known, predictable and stable way to deal with default (transfer to another company, balance made up by ASSURIS). Insurers have a great incentive to stay solvent and avoid default (it ruins everyone's business if an individual insurer defaults).
The "sugar-daddy" model of DB pensions guaranteed by a corporation are an issue, but not for the reasons advanced by the PAYGO argument.
Posted by: Determinant | March 10, 2013 at 05:26 PM
Though, on the macro side,in a money and banking economy every pension system is PAYGO, unless you accumulate Pablum and walkers. Usually forgotten by partisans of "fully-funded" plans.
Posted by: Jacques René Giguère | March 10, 2013 at 06:16 PM
Frances: Yes, my RRSP is with TDCanadaTrust (as Bob Smith deduced.)
Since we're naming products, you could also look at iShares various ETF products if you have a cheap way to hold shares in your RRSP (which I think TD also offers.) I was recently amazed at the variety of iShares ETFs that BlackRock (the company behind the product) are now offering in Canada...I suspect they are the dominant player here at the moment.
Posted by: Simon van Norden | March 10, 2013 at 06:40 PM