Friday, 7 April 2017

Happiness and Retirement – The End Goal


When planning for retirement, managing the amount of spending is key as income from retirement vehicles such as government and company  pension (for the lucky few that are members of defined benefit plans), withdrawals and annuities from RRSP/RRIFs will be somewhat fixed.

Here are the different phases one can expect to go through…….

Phase 1 (age early 20s) - We found our dream job, work our tails off, pay off student loans, pay rent, climb the corporate ladder and hope to save enough for the inevitable down payment in a runaway, crazy real estate market in Toronto .

Phase 2 (age late 20s) - We get married, form a family with children, purchase a home and enter the debt accumulation phase where it felt like you would never be able to make ends meet with mortgage payment and childcare costs (assuming two working spouses) taking a huge chunks of your after-tax take home pay.  It is estimated that it costs $250,000 to bring up a child.

Phase 2A (age mid to late 40s) – Kids grow up, enter university. Just when you think you have paid off most of the mortgage debt, you would now have to finance your kids’ education as well.  You better hope that you have wisely contributed to the RESPs and that the earnings have been growing steadily, net of fees.  

Although your career has continued to blossom, you may start felling tapped out and concern that the whizz kid that the company just hired may replace you soon.  Anxiety creeps in. You probably weigh 20 or more pounds then you should. Your health also starts to suffer.

Phase 3 (age early 50s) -  Finally, you pay off your mortgage and your kids complete their university studies… and you start thinking about retiring. But guess what, your kids can’t find a job in this ultra-competitive and specialized job market because they studied the wrong field of study. They moved back in with you (case of the boomerang kids)

Phase 3A (age early to mid-50s) – Congratulations! You survived all the previous layoffs and corporate restructuring, but unfortunately, you could not escape this one. You are faced with a dim prospect of securing similar employment with another company, and not having saved enough during all these years.  I hope not a lot of people fall into this situation, but I personally know people who are experiencing this right now, and how painful it feels!
But please do not despair. There are a lot of social safety nets available in Canada. 

Do talk to a social worker , ask for help, be humble. I doubt if anyone dies of hunger in Canada because he or she cannot afford to buy food or seek shelter.

I thought of finishing here because it gets too discouraging, but let me re-write the script with a slight twist and some self-promoting that have a happy ending.

Revised (do read the adds/changes in RED)

Phase 1 (age early 20s) - We found our dream job, work our tails off, pay off student loans, no loan to pay since you have been paying your school expenses with earnings from co-op jobs while at school, pay rent, stay at home to minimize rent expense, climb the corporate ladder and hope to save enough for the inevitable down payment in a runaway, crazy real estate market in Toronto.

Enjoy, but also start to plan ahead by investing wisely. Take advantage of TFSA, RRSP, company matching plans, work with a financial advisor , who is a CFP like myself, continue to further your education (at company’s expense), and finally spend wisely. And if you have not purchase any life insurance policy up to this point, do consider buying one as it is a lot cheaper to buy when you are young and healthy.

Phase 2 (age late 20s) - We get married, form a family with children, purchase a home and enter the debt accumulation phase where it felt like you would never be able to make ends meet with mortgage payment and childcare costs (assuming two working spouses) taking a huge chunks of your after-tax take home pay.  It is estimated that it costs $250,000 to bring up a child.

You and your significant other are able to put a large down payment (no CHMC insurance for down payment higher than 20%) on your starter home.  You also use your Home Buyer’s Plan (maximum $50,000 per couple). You get your parents and in-laws to help out with childcare.  Both of you continue to build equity on your home as well as your investments.  You continue to work with your investment advisor, who advises you to review your life insurance and other financial needs.  You and your spouse continue to be active in work as well as enjoying working out in the gym.

Phase 2A (age mid to late 40s) – Kids grow up, enter university. Just when you think you have paid off most of the mortgage debt, you would now have to finance your kids’ education as well.  You better hope that But since you have wisely contributed to the RESPs  since your children were born and that the earnings have been growing steadily, net of fees,  you need not worry.             Although your career has continued to blossom, you may start felling tapped out and concern that the whizz kid that the company just hired may replace you soon.  Anxiety creeps in. You probably weigh 20 or more pounds then you should. Your health also starts to suffer. Because you have taken care of yourself, both professionally through continuing education as well as keeping healthy, you shrug it off. Everyone feels threaten as this age. It is only natural, but you have to focus on the positive side of things. Ask for a lateral move to another department or position to rejuvenate your career. 

On the positive side, you and your spouse are well on your way to a stable retirement life, having manage your finances well. Your investments are growing at an average rate of 5% after inflation and fees, your home continues to grow in value at an average rate of 5% (none of the Toronto crazy real estate prices applies in this example). Your CFP financial advisor tells you that you can probably retire in a couple of year if you choose to and discuss some tax savings strategies.

Phase 3 (age early 50s) -  Finally, you pay off your mortgage and your kids complete their university studies… and you start thinking about retiring. But guess what, your kids can’t find a job in this ultra-competitive and specialized job market because they studied the wrong field of study. They moved back in with you (case of the boomerang kids). Your kids are off on their own starting Phase 1 of their life (note the revised version). You and your spouse decide to retire early, but continue to live in your existing home.  

Both of you travel extensively. Because you have invested well, you can count on a steady stream of passive income from your RRSP and TFSA accounts. To supplement the income, you decide to work part-time as well with none of the corporate stress.  When you turn 65, you start collecting your government and company pension as well as review your estate planning.  Here’s to a Happy Retirement Ending!



Sunday, 2 April 2017

Executive Compensation

How much is enough? Headline grabbers such as senior executives from Hydro One and Bombardier defending 50% pay increases and compensation in excess of 100 times the average earnings of Canadians continue to baffle me.  While the peons like you and me have to suffer the brunt of  corporate restructuring, massive layoffs, lack of job security, continuing cost cuts, the few executives in C-suites are sitting back and counting their mega-millions stop options and bonuses. While our government are quick to defend that world class corporations requires world class leaders, and hence world-class compensation, in reality it is not difficult at all to do the job.

First, how often do you see the executives in office? If they are not jet-setting the world in luxury settings or playing golf, they are of hardly any use at all.

Second, do you ever see a senior executive answering customer’s call at time of crisis? Or if there an issue at the production floor, do you ever see them rolling up their sleeves trying to fix the problem? The answer is that they hire people to do the job and only reap the rewards at the end.  It is also a no-lose situation for them. If they do a half-decent job, they are rewarded immensely. If they screw-up, which is more often than not, they get the golden handshake and walk away with millions of dollars, while leaving the company in a mess.

Third, one trick I often learned whenever there is a problem, the executives would always ask questions first and never answer any.  And whenever a question is asked, the executive would look around and ask what you think instead?

Fourth, in difficult times, they always engage consulting companies to do the dirty job and to identify areas of improvement? Why are companies spending millions of dollars engaging consultants to tell them what the problems are when in fact, they should already should already know the problem and how to resolve them.

Fifth, it is true that the number of ‘qualified’ people is in short supply because the very people (Board of Directors) that hire them are also senior executives themselves. It is a very close circle of people who look after themselves first. Look at the number of executives who are also member of Board of Directors at other companies. I sometimes wonder where in the world they have so much free time to sit on other board (with huge compensation, too!). Somewhere in the world, they must be more than 24-hours in a day!

To say that I have lost faith in the ability of senior executives to lead effectively is truly an understatement. A monkey can do a better job. Just as in stock picking, the number of active fund managers underperforming the market is an astounding 80% or more on a consistent basis.  


The Wealth Effect

I watched a documentary on TV Ontario last night called “The Super-Rich and Us.”  Shot mostly in London, England, Jacques Peretti investiga...