Tuesday, December 23, 2014

Avoiding Retirement Setbacks

Ignorance or bad luck?

There are many things that can derail retirement dreams.

We all make mistakes when it comes to investing, but with retirement all our chips are on the table. There are no more chances to recover what we lost. Whether caused by bad luck or bad skills, we need to be aware of what can go wrong when we plan for retirement.

Retiring early

According to statistics, about 40% of workers retire earlier than anticipated. About half apply for the Canada Pension Plan before age 65, the age where the pension is not reduced for early retirement. Postponing retirement is a great way to get "actuarially" increased pension benefits (available for the CPP or any defined benefit pension sometimes offered by employers), and the later we retire, the more money we can spend each year from our nest egg.

Underestimating longevity

Our retirements will be much longer than our parents. We are healthier, more active and medical advances will keep us alive for as long time.

At age 65, a male has a 50% chance of living to age 85. A female has a 62% chance. So retirement is going to last 20 to 30 years, longer if you retire earlier. It is necessary to pace our spending in order to go the distance with the funds that we have.


Retiring with large debts, such as a home mortgage makes it very hard to accumulate wealth when a part of our savings have to pay off debt. Being debt-free is an essential ingredient of a worry-free retirement.

Medical expenses

Unforeseen medical expenses is a bit of an oxymoron. They are not unforeseen because they will happen at one point during retirement and there's unfortunately no way around this. You should explore ways to cover these costs, preferably via medical expenses insurance, otherwise by having funds set aside to cover the cost. Part of this should include funds or insurance to cover long-term care needs.

Excessive withdrawals

Withdrawing too much each year is a prescription for disaster. Either have a detailed and financial plan for retirement where you can assess your odds of success, or abide by the "4% rule", a popular guideline stating that you should withdraw only about 4% of your retirement savings annually. The "4% rule" is not a rule, but many studies concluded it is a "safe" withdrawal rate (read this blog post about the 4% rule).

So try not to overspend and live it up too much, be reasonable and curb your appetite for costly undertakings such as travel, toys or adventures.

Out of the market

The return on guaranteed investment certificates and savings account are pitiful. Investing in a diversified portfolio that includes equities has higher risk, but historically has earned way more despite the added volatility. Remember that retirement is a "long" game, and that a few disappointing years are rewarded many times over by much higher overall returns.

Education first?

If money is not sufficient for retirement, it cannot be diverted to your children's education costs. Putting education costs before retirement costs can put you in a dire situation. Your children have their whole financial lives ahead of them. Try to refrain from depleting your retirement assets or your home equity to pay for your children's education.

Impact of tax and fees

Knowing that your retirement can last very long, it makes sense to take advantage of tax efficiencies that can be achieved by investing equity-type assets in a non-registered account and less tax-efficient investments in a tax-sheltered plan such as a RRSP or RRIF. This is because capital gains and dividends have a preferential tax treatment, while interest income (e.g. interest income on guaranteed investment certificates) is taxed the same as income or withdrawals from registered funds.

Account fees also have a large impact. For example, an RRSP with a 1.5% annual account fee would leave you with 28% less money than a plan with a 0.5% annual fee.

My plan is no plan

One last retirement mistake is retiring with no plan or investment strategy. Many of us do this. Lack of planning can bring unpleasant financial surprises because we don't know how much we can spend and where the money will be coming from.

The flip side is being overly conservative and not living life to the level that our funds can support. So our retirement becomes a lost opportunity to do all the things we wanted to do during our lives.

A plan will make you spend just the right amount, while having the peace of mind of knowing you can maintain your standard of living to an advanced age.

Plan plan plan

These are a few of the retirement planning mistakes that are so easy to make. We should do our best to avoid them.

Take some time to review and formulate a retirement strategy. It will set the course for a carefree retirement where you can enjoy life to the fullest.

Tuesday, November 25, 2014

Retirement Savings Marathon

The magic bullet

We try to learn about investing and become better at it, but too many of us cannot overcome being financially challenged, or more precisely being comfortable making investing decisions. To boot many have no time or interest in the topic.

To alleviate this state of affairs, the Canadian Government established a federal Task Force on Financial Literacy. The task force made several recommendations for improving financial knowledge and these will take time to be adopted by the public.

What should we do to improve our odds of success?

Our biases

Behavioural science tries to understand social, cognitive and emotional biases that affect and influence economic decision-making. When it comes to money decisions, we don't act in a rational way.

There are several factors that play against us:

  • Overemphasizing immediate rewards at the expense of long-term needs,
  • Procrastination and inertia: delaying decision and a difficulty to change course,
  • Preferring the status quo to making active decisions,
  • Complexity of making retirement planning decisions far into the future, and 
  • Choice overload: the sheer volume of choice causes "paralysis analysis".

Meeting the challenge

Maybe we can learn from how employers and stakeholders worldwide have met the challenge of encouraging pension plan members to save for their retirement. I am referring here to capital accumulation plans such as defined contribution pension plans or group RRSPs. One big problem has been the large number of employees lacking any interest in their pension plan and more generally the task of saving for retirement.

This negatively impacts the level of contributions and investment returns and is disastrous to retirement income adequacy. Too many employees  commonly continue to contribute at the rate they first chose when they joined the plan and remain invested in the portfolio they were defaulted into initially.

So the industry addressed this apathy by adding automatic features to savings plans: enrollment, escalation and investing.

With "auto-enrollment", employees don't decide whether or not to enroll in a plan, they are automatically enrolled but have the right to opt out. This address the concern of employees never joining a plan and not bothering to save at all.

"Auto-escalation" adds automatic increases to the contributions rate over time. An employee who joins the plan starts contributing at a low rate, and as time goes on, the contribution rate slowly rises over time until it reaches a level that improves the chances of providing a reasonable retirement income. This concept helps employees "ease in" to the plan in a financially manageable way, while maximizing contributions as retirement becomes closer.

The other popular feature is to "auto-invest" the contributions. Instead of defaulting to money market funds, which cannot provide the investment returns required to accumulate an adequate retirement nest egg, the default fund where contributions are invested is a "target date" fund appropriate to the plan member's investment horizon. For example, these funds invest younger employees in higher-risk portfolios that automatically glide toward a more conservative profile over time.

These features are beneficial in many ways. First, it gets employees to develop solid savings and wealth accumulation habits. Second, it reduces the likelihood of getting extremely low investment returns and making them disengaged with the daunting task of saving for retirement. Third, experiencing volatility in the early years - when assets are low - teaches the discipline of "staying the course" and riding fluctuations with a low impact on the long-term outcome.

Being young

Younger savers have very different priorities, and saving for retirement isn't at the top of their list. Retirement is a lifetime away, and getting started in the housing market, paying off debt, travel, sports, hobbies and having a safety net for emergencies leaves little room for the retirement planning savings marathon.

But living in the present, where spending trumps saving, does have very real implications on the ability to retire with adequate income. Building savings to provide retirement income for 30 or more years requires patience and discipline, and it starts with regular ongoing monthly contributions that increase over time and are invested in a portfolio appropriate for the investor's risk tolerance and investment horizon.

These auto-features are designed to address the shortcomings identified in behavioural science and steer investors in a direction that serves their long-term interests.

We can all learn from this by adopting these strategies and forcing ourselves to act rationally with our economic decisions.

Thursday, November 20, 2014

What Makes RetireWare Different from Other Products


I am looking at getting a planning software that helps calculate retirement but also shows clients their net worth. Why would I use RetireWare rather than other products? Which version would you suggest I use?


RetireWare is unique in the following ways:

  1. Focus on long-term planning: this product is to plan the financial aspect of retirement.
  2. Sophisticated mathematics: detailed projections of assets and income, accurate income tax calculations, Monte Carlo simulation, odds of success, risk management (assessment of post-retirement risks such as longevity, inflation, market returns, sequence of returns, long-term care needs, etc.).
  3. Five components: detailed retirement, quick retirement calculation, investor profile, budget and net worth.
  4. Data entry: easy and quick data entry, organized logically using a clean tab interface.
  5. SaaS: web-based software as-a-service.
  6. Collaborative: you can provide account access to your clients. They get a simplified version and can view their plan online and enter their own data.
  7. Engagement: although you can generate reports with RetireWare, it's more engaging for users to access their account and see their plan online. 
  8. Easy to update: by regularly updating (using a quick update wizard), you can keep the plan fresh and provide a road map to retirement to your clients.
  9. Social media: links to allow users to "spread the word" about you on their social networks.
  10. News: you can broadcast messages or news to your user group (such as market commentary, current events, upcoming seminar, reminders, etc.) that they'll see when they login to their account.
  11. Customization: when your users login, they'll view your profile that can be customized with your logo and colour scheme.
  12. Design: clean design and user interface (see our tutorials: http://www.youtube.com/user/retireware).
  13. Results: detailed results with numerous charts and tables.
  14. Dashboard: once you do a plan, you get a dashboard view of the results.
  15. Other tools: over a dozen other stand-alone calculators.
  16. Help: comprehensive help and product support blog.
  17. Canadian-based: federal and provincial income tax, RRSP, TFSA, jurisdiction-specific LIF, pensions, etc.
  18. Data security: no possibility of data loss or breach on local PC; the data is stored securely in our encrypted database.

If the collaborative features are something you would use, then I would recommend the Professional Collaborative version, otherwise the Professional version that gives you 50 files, but no collaborative features.

Monday, November 10, 2014

If You Want to Learn About Products from Competitors

There are very few retirement planning software products for individuals, but there are a few for financial advisors.

AdvisorTek maintains a comprehensive directory for the latter. The directory lists software and technology providers for corporations and advisors in the financial services industry.

Note that some products are for Canadians and others for US users.

Here's the link:


RetireWare is under our company name: Apeiron Software Limited.

Activity Report for Professional Collaborative Version


Just curious if there is any way to see if a client has logged into their file or are using it at all ?


After logging in, click 'Network' on the left toolbar, then click 'My Network'. At the bottom there is a user list with some basic information.

Then click 'Activity' on the same toolbar. On the 'Activity' tab, toward the bottom of that page there is a section called 'Recent Activity' that shows a list of new users and recent visitors.

Canada Pension Plan Estimate


I am getting a CPP payout of $0 in my detailed cash flow forecast. I suspect it may be because I am already (early) retired (my spouse is still working) and I have not entered any employment income in the setup data. But I have paid in at the maximum level for 27 years.


If you check Already Retired in Financial Information, you can enter annual earnings and it will only be used to estimate the CPP.

Your other option is to enter the actual CPP you expect to receive and the age of commencement in Government Pensions on the Pensions page.

Assets and Future Income


I do not plan to retire for another 10 years. Does the software allow me to input my current income details (indexed for inflation) and asset (residence, RRSPs, investment portfolio) and liability balances as well as current expense budget (indexed for inflation) to see how I am trending to reach my retirement goals?


Yes you enter your income before retirement and it will increase each year in line with a wage increase assumption. You can also enter all assets and liabilities (in particular mortgage balances on properties and remaining term).

For the budget, you can complete a pre-retirement budget and a post-retirement budget separately. Your post-retirement budget will be used for setting your retirement income goals (and is indexed as well to retirement and each year thereafter).

Lifestyle Needs


Does RetireWare allow you to enter your lifestyle needs item by item. e.g. housing expenses, living expenses Including food, entertainment etc etc), travel expenses, transportation expenses.

Then does it allow you to enter RRSP and TFSA balances and unregistered investment accounts separately for myself and my spouse and then set different returns for different investment products i.e. cash (1%), bonds (2%), Canadian equities (5%), foreign equities (7%).

Does it allow you to set annual contributions to the RRSP an TFSA and then set dates when withdrawals may or may not take place.

What about personal residence and recreational property?


1. You can base your income goal on a detailed post-retirement budget that includes nearly 50 different items.

2. balances are separate by type of account and include RRSP, TFSA, non-registered and locked-in, also separated for each spouse.

3. You can customize expected investment returns for the following asset classes: cash, fixed income, Canadian equity, US equity and international equity. The program suggests defaults as well.
The expected return will depend on the asset mix selected for the calculations.

4. You formulate an annual savings goal and select one of several savings rules, such as maximizing the RRSP, then contributing to the TFSA. RRSP and TFSA limits are applied and carried forward.

5.  Withdrawals are driven by the retirement income goals. After taking into account annual income from public and private pensions, shortfalls are funded from non-registered assets, TFSAs, locked-in assets and the RRIF.

6. You can also include the disposition of the personal residence, other property, business or other future assets in your plan.

Income Goals and Rates of Returns


I just have a couple of questions before I start rolling it out to  my clients.

1. When it asks for Annual retirement objective … choice # 2 – total dollar amount:   Will this include all sources such as CPP , OAS , and then net of tax if indicated below? Or, is this just going to draw from one’s own savings ?

2. Standard forecast on rate of return: what rates are used? How does that work?


1. The retirement income objective is how much you want to have each year during retirement. The income forecast tries to meet the goal with CPP, OAS, other income or company pensions, and make up any gap from invested assets.

Note that the retirement objective is in terms of "today's dollars". So if you enter say $50,000, and retirement takes place in 10 years, and inflation is 2%, the actual retirement objective in the year of retirement will be 50,000 x 1.02 ^ 10 or $60,949.

2. The standard are the default values shown in the Custom Forecast.

  • Cash and equivalents: 2.25%
  • Fixed income: 6%
  • Canadian equity: 7%
  • US equity: 8%
  • International equity: 8%

The above are exclusive of investment management fees.

The standard also has values for inflation, real estate and wage increase, also shown in the default values.

MonteCarlo Calculation


I have a dilemma. Hopefully you can help. My investment advisor recently provided me with a retirement plan using Naviplan. Income, future assets etc were comparable to what I calculate using RetireWare.

However, for same scenario Retireware is indicating 100% prob of success. He is indicating 14% failures. - He targets 10% max as acceptable.

I am not sure what he is using for Retirement Goal Tolerance - rest of the variables look comparable.
 Based on what it has taken to get to this point, I don't have a lot of confidence in his results and I would not bet my life on my results.

I assume that both Naviplan and RetireWare should yield generally comparable Monte Carlo results?


Please note that there is a setting in the Options page that counts small shortfalls as a success, so by setting the threshold to $0, the probability may go down.

Also note that Naviplan probably uses a different approach for their simulations. For example, they may use only one expected return and volatility, or maybe only fixed income and equities for the asset classes. In any case, with such calculations resting heavily on assumptions and methodologies, one may view a 14% failure as equivalent to a 10% failure. Also, an advisor will tend to err on the conservative side since your success is at stake, so he may be extra careful to recommend higher spending.

One way to assess your plan is to look at the various results produced by the software. You have the odds of success, a deterministic projection based on your selected expected returns (or RetireWare's standard, which is fairly conservative). You also have a projection assuming you earn poor investment returns in the future. Then there is the risk analysis that "stress tests" the plan against the main risks under various economic conditions.

Our idea in making decisions when facing an uncertain future is to take a "holistic" approach. If you see that most indicators are favorable, then you probably are OK.

One last thought. If you find you experience lower than expected returns or higher expenses after a year or two, you are able to correct the course by monitoring your plan and adapting your
spending going forward to set you back on solid footing to meet your expenses throughout retirement.

Mac Compatibility


 Please confirm that your software will run on a Mac book Pro laptop Space running the latest Apple software.


This is a Web-based application that runs from any of the main Internet browsers, including Safari running on a Mac.

Cash Flow Forecast


In the Cash Flow Forecast Detailed Data Table, there is a column of data called "Retirement Objective Net". From what I can see it includes the Post retirement expenses that I setup along with
special expenses according to the parameters that I setup in the "Retirement Income Target" in the Forecast page.

However I can't seem to reconcile the data in that column against the budget...it is always higher. Can you tell me what data is included in that Retirement objective Net column


The expenses you entered are in "today's dollars". So if it's payable in. say, 10 years, the annual expenses are increased by the rate of inflation applicable during that period.

This is to ensure that your assets can pay for the expenses when they are incurred in the future. Look in the Help file, under Forecast Menu | Retirement Income Target |  Adjustments to Retirement Income.

There is more information and an example about the impact of inflation in the Help section.

Asset Allocation Used for the Calculations


Under Asset Allocation it states “The Investor Profile Questionnaire established that the following portfolio: Security might be the most …”

Do I assume that RetireWare used a “Security” mix for my investments?


The calculations use the asset allocation basis selected on the Asset Mix for Projections tab on the Options page. You can select an asset allocation based on one of the profiles, the current asset mix, or your own custom allocation.

Use of Personal Residence for Retirement Income


Under Sources of Retirement Income it has “yes” next to Personal Residence even though I indicated for both my wife and me “Never” under “Financial Information – Principal Residence – Sell Principal Residence.”  Are the income projections using the value of our personal residence or not?


Since you selected 'Never', there will be no sales taking place. If you had selected a year for the sale but left the personal residence unselected in Sources of Retirement Income, then the funds would not be used for retirement.

Collaborative vs. Professional Version


My understanding of RetireWare is that the Professional Version is used by the financial professional to prepare a retirement plan for the client. The client is then not able to access the plan to update its progress. Is that correct?

My understanding of the Collaborative Professional Version is used by the financial professional to prepare a retirement plan for the client, but the client is then able to access the plan via the web to update its progress and view the information. Is that correct?

In your experience, given that my above understanding is correct, which of the above approaches is the one that has met with the most success?


Your understanding of the difference between the Professional and Collaborative versions is correct.

With RetireWare, you will get a financial plan for retirement that includes a cash flow forecast, odds of success, assessment of the exposure to each of the main post-retirement risks. The output is the same regardless of the product between the Pro and Collaborative version.

Note that with the Collaborative version your users get a simplified version and reports in order not to overwhelm them with too much complexity and details.

For a recommendation, the Pro version is more suitable if you want only to create reports and transmit a PDF to your clients. If you want to build a user base from online referrals, then the Collaborative version is the way to go.

Education Savings


I'm not sure where I enter my RESP contributions.. Can you please help?


You can enter RESP contributions on the Budget Information tab on the Pre-retirement Budget page. There is also a stand-alone RESP planning tool on the Applications tab on the main page.

Wednesday, August 6, 2014

Government Pensions


If I take my CPP at the age of 61 and OAS at 65 does the software automatically do the calculation or do I enter it in as other income?


The software will estimate the CPP based on your annual earnings (provided in the Financial Information page), and apply the early retirement reduction if you select the option to get an estimate.

The OAS amount will be based on the age of commencement and year of Canadian residency.

Differences Between Professional and Collaborative Versions


My understanding of the RetireWare software is that the Professional Version is used by the financial professional to prepare a retirement plan for the client.  The client is then not able to access the plan to update its progress. Is that correct?

My understanding of the RetireWare software is that the Collaborative Professional Version is used by the financial professional to prepare a retirement plan for the client. The client is then able to access the plan via the web to update its progress. Is that correct?


Your understanding of the difference between the Professional and Collaborative versions is correct.

With RetireWare, you will get a financial plan for retirement that includes a cash flow forecast, odds of success, assessment of the exposure to each of the main post-retirement risks. The output is the same regardless of the product between the Pro and Collaborative version. Note that with the Collaborative version your users get a simplified version and reports in order not to overwhelm them with too much complexity and details.

The Pro version is more suitable if you want only to create reports and transmit a PDF to your clients. If you want to build a user base via referrals, then the Collaborative version is the way to go.

RetireWare Versions and Calculations


1. What is the difference in the level of detail and complexity of analysis in the retirement plans between an individual user and an advisor user besides the number of different plans that can be created?

2. What do you do for tax rates?

3. Can I see reports that separate my registered investment accounts from the margin accounts? Does the margin acct report show the adjusted cost base as well as the projected market value?

4. Can I update the plan annually by entering say December 31st market values?


1. There are three version: individual (DIY), Professional and Collaborative. The retirement plans are identical, only the number of files vary. In addition, you can provide online access to files to clients and prospects.

2. The retirement forecast uses accurate income tax in the calculations.

3. The cash flow for each type of assets is shown separately in detailed tables in the results. The margin account does not show the evolving adjusted cost base (ACB) over the years, but the calculations do take into account the ACB.

4. Yes, you can update the plan using the Update Wizard or accessing the detailed or quick planner at any time. If you don't use the Update Wizard, just ensure you revise the date of calculation to a recent date in the General Information page.

Sources of Retirement Income


Under the “Sources of Retirement Income” it has “yes” next to Personal Residence even though I indicated for both my wife and me “Never” under “Financial Information – Principal Residence – Sell Principal Residence.”  Are the income projections using the value of our personal residence or not?


Since you selected 'Never', there will be no sales taking place. If you had selected a year for the sale but left the personal residence unselected in 'Sources of Retirement Income', then the funds would not be used for retirement.

Asset Allocation


Under Asset Allocation it states “The Investor Profile Questionnaire established that the following portfolio: Security might be the most appropriate etc…”

Do I assume that the RetireWare used a “Security” mix for my investments listed under Finances or will it use the “Selection of Rates in Economic Outlook?”


The calculations use the asset allocation basis selected on the 'Asset Mix for Projections' tab on the 'Options' page. You can select an asset allocation based on one of the profiles, the current asset mix, or your own custom allocation.

Copy Functionality

A new feature has been added today!

Now you can copy an existing file to do what if scenarios or try different retirement strategies and evaluate their financial impact. For example, you can copy an existing file and try a different retirement age, life expectancy or income goal with the new file.

The file copy feature is on the first tab of the File Manager (landing page after logging in).

Enter the file ID of the file you want to copy and click the Copy button. A message will confirm the successful completion of the copy operation, an your file will appear in the file list. You can then select it and work on the file copy. The word 'COPY' is appended to the last name in order to differentiate it from the original.

Common Settings

Features Update

Data entry is made to be as uniform as possible for each spouse to make it easier to find all settings.

We have a new release in which we apply changes to both spouses to avoid the need to enter the same information twice in the following areas:

  • CPP marital status
  • CPP sharing and CPP sharing common years
  • Pension income splitting
  • Economic basis
  • Monte Carlo settings
  • Risk analysis settings

With this change you no longer have to change these common values for each spouse when you prepare a retirement plan that combines the financial information of both spouses.

If you make any change to these settings to one spouse, they will be applied to the other spouse.

Tuesday, June 10, 2014

What Are the Odds Telling You?

How much is enough?

A big concern when starting retirement is knowing if the income goals are sustainable. This question largely depends on two factors: longevity and the amount of money available for retirement.

Assuming your planning horizon is long enough, say age 95, market returns are then the deciding factor that will determine your odds.

This is because over time the amount of money saved for retirement becomes a smaller piece of lifetime assets. As your assets grow, the amount of investment income becomes greater than the capital invested (your contributions each year toward the retirement nest egg).

Most of the investment returns depend on how capital markets perform, much less from investment manager outperformance. In other words, investment returns are mostly explained by the allocation of funds between the main asset classes.

A lot of sophisticated modelling (including our own) can help determine whether the income goals are affordable and sustainable.

Here are a few thoughts related to modelling in general.

Should we save as much as we can for retirement?

Capital markets are volatile. This means that the range of potential outcomes from any model of future investment returns will be wide.

Any realistic model is going to produce a number of disaster scenarios.  When combining a large range of possible outcomes with a reduced ability to generate more capital during retirement, we can often end up with uncomfortably high odds of running out of money early.

Planning for more savings or a lower lifestyle are foolproof ways to improve our odds.

How can I spend my last dollar on the day I die?

The range of outcomes not only include disastrous possibilities. On the flip side, there is a chance that you will reap spectacular returns over the long run.

If you experience this as you get older, you can revisit income goals and apply windfalls to improve your lifestyle going forward.

It's better to be conservative at first and increase spending later if the money is on the table than the other way around. This way you take advantage of a windfall if it occurs, and keep spending conservatively if it doesn't.

Why not take risk away and invest in GICs?

You can remove the unpredictability of returns by getting guaranteed investments returns. For example, if you invest in GICs, you will know what you can earn and your range of outcomes will be much narrower.

But your retirement plan may no longer be affordable. The magic of investing part of your assets in equities is that the portion of lifetime assets coming from investment returns greatly exceed the capital invested for retirement.

Why trust a model when the future is unpredictable?

A model shows us what might happen. We cannot predict future investment returns, but we know that annual returns will form a pattern of good and bad years.

Outcomes from a model depend on assumptions, in particular those for expected returns and volatility. Volatility is the amount of variability that can occur for each asset class and is used to reproduce the unpredictable swings in equity returns.

With these ingredients, the model will produce a  range of potential outcomes. The range can be frustratingly large, but its value lies in providing insights into the sustainability of the retirement plan.

A model will determine the odds of success and failure.

But for the model to be even more useful, we can monitor results regularly as they unfold by re-evaluating our financial position and recalculating the odds.

Monitoring the trend will give you peace of mind, so update your plan every quarter or six months and make sure the odds remain on your side.

Wednesday, April 30, 2014

What are the Risks of Leveraged Investing?

An age old strategy

Borrowing to invest has been around for a long time. The hope is to leverage profits and the risk is leveraging losses.

Taking out a loan to invest means investing other people's money, typically the bank's money. Being risk averse, the bank will want you to dig in your home equity by taking a secured line of credit.

Many view the spread between the cost of borrowing and expected returns from fixed income investments as too small or non-existent to make this worthwhile. So this is mostly done to invest in equities.

If the money is invested in a non-registered account, loan interest is deductible. Investing in stocks or equity mutual funds are also taxed favourably: dividends have lower income tax rates, and units or shares are taxed only at time of disposition at the capital gains tax rate.

If this strategy applies to a registered retirement savings plan (RRSP), the interest on an RSP loan is not tax-deductible, but there will be tax deductions from the contributions.

Over the long term, markets have historically outperformed rising inflation and interest rates. If you have good cash flow to make regular interest and principal payments, this strategy can work: investment returns over the long-term can be significantly higher than loan interest.

Risk capacity and risk appetite

In addition to having the risk capacity to absorb a negative outcome, an investor needs a risk appetite: understanding that there is a possibility to end up poorer if market returns or specific investments earn less than the interest paid on the loan.

One also needs the stamina to stay the course when - not if - there is a market meltdown, as it invariably occurs every few years.

This has to be a long-term strategy, preferably over a period of 10 or 20 years. It is not appropriate if you are close to retirement. This is because you need to manage your market risk and sequence of returns risk, and one approach to tackle both risks is to gradually reduce exposure to equities.

Proceed with caution

Often these loans are made to "kickstart" an investment portfolio. Someone without any portfolio usually lacks investment knowledge, and is more prone to sell quickly if the investment performs poorly, instead of riding market fluctuations.

Getting a loan means renegotiating a home mortgage and converting it into a line of credit that can be used to invest, making the interest on borrowed money tax-deductible. Penalties to break the mortgage should be considered when comparing the potential return to the total cost of borrowing.

If the loan is large, it makes it difficult to repay over the short-term. So future income has to be predictable in order to make it fairly certain that regular loan payments can fit in the budget on an ongoing basis.

It also has to be possible to unwind the strategy without incurring a cavalcade of fees and penalties both on the investing and debt sides.

Magnified gains and losses

Suppose you have $100,000 and you invest it. After two years, the value of your investment declines to $80,000. You sell your units or shares for an investment loss of $20,000 and are left with $80,000.
Now suppose that in addition to this investment, you borrow another $100,000 to invest. Your initial investment is $200,000. You sell your investment after two years and receive $160,000. You repay the loan plus the interest of say, $110,000. You are now left with $50,000.

If everything went well and the investment went up 20%, you would have doubled your gain: $40,000 with leverage compared to $20,000 without.

The downside is larger than the upside because of the interest on the leveraged loan.

Cost of investing

This applies also without leveraging, but you should understand all costs, fees, penalties and commissions of the products you are purchasing. Costs you pay will reduce your investment return. Often investors are not aware or don't understand sales charge when purchasing mutual or segregated funds, including penalties at time of disposition.

When to avoid

If you are uncomfortable or have difficulty managing debt, have a history of poor financial discipline or lack a steady flow of income this strategy is probably not suitable.

Investment loans are not a good solution for emotional or impulsive investors. Avoid any Investment that can give rise to a margin call. It can and usually does occur at the worst possible time and can result in a disastrous outcome.

Also avoid if your future circumstances are hard to predict. If cash flow is prone to change significantly or a large unforeseen expense is possible in the future, being unable to unwind the investment and loan quickly will make this even more challenging.

With the interest not deductible on a RSP loan, a longer term for the loan means that the interest paid may largely offset the value of the tax deduction received from the RRSP contribution.

Shrewd advice

The Ontario Securities Commission has great information on leveraged investing. They recommend investing for the long-term because the risk of leverage declines as the time horizon grows. As well, they suggest paying interest and principal on the loan, not interest only, so the smaller amount owing at time of settlement reduces the chance of loss. Finally, they emphasize the importance of adopting a disciplined investment strategy, avoiding fads and ignoring short-term market fluctuations.

Friday, April 11, 2014

RetireWare Not Affected by "Heartbleed" Vulnerability

There has been extensive media coverage recently on the vulnerability dubbed “Heartbleed”, which is a security concern for secure communications using OpenSSL, a widely-used open source cryptographic software library.

It can allow attackers to read the memory of the systems using vulnerable versions of OpenSSL library.

The RetireWare Website and applications run on Microsoft Web servers, which use their own encryption libraries for secure communications, not the OpenSSL library.

Accordingly, secure communications on the RetireWare Website are not at risk for the "Heartbleed" vulnerability.

For more information, please contact RetireWare Product Support.

Tuesday, March 25, 2014

Making Decisions when Facing Uncertainty

A way to think about risk

Using an example, I'd like to show how risk theory can help us manage our uncertain future. Risk theory is a branch of mathematics that provides a framework for making decisions with uncertain outcomes.

When it comes to retirement, we are facing the unknown: we don't know how long we'll live and what will be  the rates of investment returns earned on funds used for retirement income. Also, expenses are unknown because of future inflation and the possibility of health-related and other expenses such as long-term care down the road.

Knowing the range of possible outcomes is our starting point to manage uncertainty.


The starting point of risk theory is the set of possible uncertain environments. Decisions we make influence the results we get in the environment that prevails.
Decisions + Environment = Results
For each decision there is a probability distribution. Making the best decision means choosing the "best" distribution of results among those available.


Suppose I am retiring with a nest egg of $1 Million.


I am considering two withdrawal options:
  • Spending $50,000 per year  (5% of my initial capital), or
  • Spending $70,000 per year  (7% of my initial capital).
In both cases, my annual withdrawal will increase each year by the rate of inflation, so my purchasing power is preserved.


My environment is an uncertain future with unknown longevity, rates of investment returns and inflation. I will run out of money if the returns are too low, the inflation too high, or if I live too long.

This may happen whether I decide to spend 5% or 7%, but it is more likely if I decide to spend the higher amount of 7% annually.


Let's define a simple range of possible results that can occur for my retirement:

I ran out of money and spent several years penniless
I ran out of money at the end of my life while curbing my spending throughout retirement
I didn't run out of money but had to curb my spending
I didn't run out of money and enjoyed a good standard of living

We can calculate odds for each decision that we make. Let's go with the probabilities below for our example. They're in line with these types of calculations and will be sufficient for our purposes.

Probabilities for 5% spending decision


Probabilities for 7% spending decision


So for the 5% spending decision, I have a 70% chance of a "good" result and a 30% chance of a "bad" result. With 7%, results are more extreme: the higher spending rate decision will be "excellent" if I live just the right number of years and earn decent returns under moderate inflation. But if things go wrong, I will be poor and destitute and it will be truly "awful".


My optimal decision means that I must choose the probability distribution that has the best overall outcome for me.

A common approach consists in assigning an "utility" to each result, and calculating the expected utility of each decision. I then choose the  decision that has greatest expected utility.

I will assign a rating from 0 to 10 to the utility of each possible result. The rating is arbitrary but one with which we are familiar.


And the winner is...

Now we have all the ingredients to calculate the "expected utility" of each decision.

Spend 5%
0% * 0 + 30% * 3 + 70% * 6 + 0% * 10
Spend 7%
70% * 0 + 0% * 3 + 0% * 6 + 30% * 10

Not surprisingly, the 5% middle of the road approach is more sensible. The odds of "excellent" are too low to add a significant utility to this decision.

This is sensitive to the rating and the odds we assign to each result. You can see that I'll need a 50% chance of success with the 7% spending decision to match the utility of the lower spending decision. But even at 50% it is still a big gamble.

What if

What if I have lifetime income, say public pensions and an annuity that are sufficient to cover my essential expenses? Now my nest egg is only for discretionary expenses such as travel, leisure and bequest.

My results will be different: if I run out, it's not so "awful", it's just bad! My life will just have less leisure but I won't be destitute.

7% spending decision


And here's my new utility with the 7% spending decision:
0% * 0 +70% * 3 + 0% * 6 + 30% * 10 = 5.1
Now both spending decisions are just as good.

Theory and practice

This framework is a way to apply some logic to help us take decisions. It can help with any type of situation.

With retirement, we cannot know how the future will unfold, and in spite of the uncertainty we need to make decisions that involve risk. Results of our decisions are influenced not only by our decisions, but also by the range of outcomes.

By keeping our options open and monitoring our progress, we can take corrective action mid-course to mitigate the damage if our decisions turned out to be not "bad" but "awful".

Tuesday, March 4, 2014

Monte Carlo Details


How are the economic scenarios used in the Monte Carlo simulations generated? Are they generated within the software, or does the software contain a set of hundreds of scenarios that are used when necessary?

I am trying to understand the stochastic projection component of this software better.

Any more information on this aspect of the software would be appreciated. Thanks.


The random scenarios are generated assuming rates of returns of each asset class follow a lognormal distribution. Expected returns and standard deviations are based on historical information adjusted for current trends.

Random numbers are generated using Microsoft's random number generator. Each time the program runs a set of simulations the returns are generated based on the random number generator.

There is a blog post about Monte Carlo simulation:


You will also find some information in the RetireWare help files:


On a related matter, this is a blog post about risk analysis and our approach:


Special Expenses


I have been using RetireWare to elaborate several files to plan our retirement. I have been trying to include the sale of our actual house in two years, for example, and buy a new one at a higher price in the same year.

I cannot find any place in any of the topics where such a financial exercise is possible. Il could also be the sale of a house and the purchase of a sailboat or a motor home or whatever and its sale several years later.

Maybe another way to look at it would be to add a section where we can simulate an important withdrawal from a particular sources of cash. There is already a section where you can indicate a source of additional assets.


Please note that in the Forecast page you can enter special periodic expenses on the Retirement Income Target tab. If it is a one-time expense, enter "0" as the frequency. Frequency of 1 means annual, 2 every two years and so on.

These can be used for one-off items purchased as part of your retirement budget.

Also, in 'Budget Information', you can set up a short-term or medium-term non-retirement savings plan for acquiring a new asset or purchasing some expensive goods such as a boat.

If you want to model the purchase of a more expensive home, keep the current residence and add the difference as an 'Other Property' on Financial Information page. For example, if your house is worth $500,000 and the next house is $600,000, enter $100,000 as 'Other Property' (and the extra mortgage if any).

Pre-retirement Budget


When doing a pre-retirement budget for a couple I enter the budget under one of the individuals and it still shows a budget for the other spouse. Why?


For pre-retirement, each spouse has their own budget relative to income. In your case, you put the budget under one spouse and have not completed a budget for the other spouse.

In cases where there is no budget, the program assumes a default budget equal to after-tax income less savings. So for pre-retirement, it's best to complete a budget for each spouse commensurate with their income, or complete no budget for either spouse.

Dividend Stream


Is there a way to create another post retirement income stream of dividends from a holding company and are they treated as eligible or non-eligible for tax purposes?


There is only one stream of dividends and they are taxed as eligible dividends. Other temporary streams of income can be entered on the 'Other Income' tab on the Finances page.

They are taxed as regular income, so you may have to modify the value to reflect their different tax status if they are non-eligible dividends.

Update Wizard


One question on the “Update” feature.  I haven’t used it yet but just trying to figure out what happens when you use it. 

So say you update all the financial information and any changes that might need to be done with assumptions, etc.,  does the program then use those numbers and the date (for example if I updated the financial information to February 28th) and project the year-end results for this year based on 10 months of returns / expenses?

If you use the update feature I assume it changes the “date of financial information” to the current month. Correct? If you just go in and make changes to the data then it will be using the previous date for calculations unless you manually change the “date of financial information”. 

Basically the update feature seems to be an automated feature that adjusts the date for calculations and allows you to update the financial information. 

If you need to do more than that then you can go into the other sections to do that.


This is correct. The Update Wizard gathers all main and changing data entries in one location (mostly asset values), and updates the date as you describe.

If you use the Detailed or Quick retirement calculations, you must change the date manually.

If you go through the Update Wizard, you can always go in the Detailed Retirement calculation and change the date back if you wish. It is not cast in stone. However, it's best to update the date if you update the market values.

Summary Tables


Why TFSA’s do not show under the future assets table? They are definitely being saved as per the detailed income statements.


Because of space constraints the tables showing on the page (and in the report) can only display a limited number of columns.

Accordingly, we've combined TFSA and registered assets on the table, as TFSAs are a type of registered savings with contribution limits and tax-favoured investment income.

The detailed pop up table shows each account type in much greater detail. It can also be copied and pasted in a spreadsheet or word processor. 

'What If' Scenarios


My spouse and I are recently retired with DB pension, SERP payouts, CPP and RSP's. I need to know when to draw down RSP's in order to minimize tax and minimize OAS claw-back. Does this function exist in RetireWare?


You can try various scenarios for the DB pensions and SERPS to see what works best. If you are well-funded, the RRSP withdrawals would start at the latest age. If you want to withdraw RRSPs at an earlier age, you could enter your estimated annual income from RRSPs in 'Other Income' and see the impact of withdrawing them over a few years to minimize claw-back, instead of dragging it out with minimum withdrawals.

Friday, February 28, 2014

Any Other Risks?

Going for a ride

I never commented on the pictures at the beginning of my posts. This one is taken on the Pacific Coastal Highway 1, somewhere between Carmel and Big Sur, California. I cycled this road twice, the first time in 1995, and a few years ago in 2012 when I took this picture.

In the month of June, there are a few absent-minded tourists, some in oversized RVs, and the odd cyclist. On a nice summer day, it has a steady stream of eager travelers amazed by the natural beauty before them. Pacific 1 often runs right at land's end on a cliff hundreds of feet above the sea.

For cyclists, strong crosswinds can be treacherous especially when going uphill. In fact, I was blown off my bike by the wind, but luckily got away with a few scrapes and bruises. But the scariest facet of this road are the many bridges across gorges hundreds of feet deep. These bridges were built in the 1930s and engineers of the day never envisaged crazy cyclists passing through. So the guard rails for these bridges are about two feet tall! An unlucky combination of crosswinds and a motorist cutting me off could have easily sent me down the abyss.

Risk of an early death was acutely on my mind that day! To manage my risk I rode these bridges at the center of the road, slowing the traffic for a caravan of motorists behind me. After completing each  bridge crossing, I reverted to my usual position on the narrow shoulder allowing them to cruise past me. Fortunately that day motorists showed patience and none created a dangerous situation.

Even with these challenges I had a great ride, a memorable day of unforgettable vistas of mountains against the scintillating Pacific Ocean and a sense of accomplishment. I kept going, always aware of risks and worked hard to stay safe.

Rarely in a straight line

After this risk-fraught travel blog segue, let's return to post-retirement risks. Our task is to envision what could happen to us in the future and formulate how we can deal with each potential risk, so we can carry on with as few unpleasant outcomes as possible during this ride that is called life.

Things rarely go in a straight line. The unexpected can and usually does happen. The best we can do is know what may happen and have a plan in place to deal with adverse events.

So far, we've had a detailed look at these risks:

Examining each of the potential risks can help us make decisions on how we can minimize the odds of running out of money under all potential situations that may unfold in the future.

Other risks

The above-mentioned risks may be viewed as the most important, but there are yet others that can also have a large impact on our future.

The Society of Actuaries (SOA) has an excellent publication called “Managing Post-Retirement Risks – A Guide to Retirement Planning”:

Let's look at other risks from the SOA list (and add a few of our own) from the standpoint of predictability and risk management approaches to be as exhaustive as possible. The list will never really be complete. Other things can happen and new trends emerge. We'll have to cross these bridges when we get to them.

Declining health

We can expect our health to decline as we get older. This means increases in medical costs (particularly prescription drugs in Canada), need for assisted care and eventually long-term care.

We can protect against this in a variety of ways. Long-term care and health-related expenses insurance mostly take the financial impact away. The decision on securing coverage will then depend on affordability and expected benefits relative to premiums paid.

If this is not ideal, then self-insuring can be achieved by holding cash reserves to meet future health-related costs, or redrawing the budget by reducing discretionary expenses in certain areas to free up available funds for these emerging expenses.

Loss of employment

The dream of "freedom 55" has all but been shattered by turbulent capital markets. Is working during retirement by necessity or avocation the new pipe dream?

Employment prospects among retirees are difficult to predict because of demands different skills and economic conditions.

Supplemental income from part-time or contractual work while retired can be derailed by disappearing opportunities or declining health. The latter is bound to happen at some point, so it's best to plan conservatively for work activity during retirement, plan for less income and for a shorter period of time.  

Also, retraining may be necessary in order to maintain or improve technical skills required for your work, as this may come at a cost and take time away from paid work.

If you have a defined benefit pension plan that offers phased retirement, it may be a good solution to transition to full retirement. Phased retirement pays you a partial pension while you continue working on a part-time basis for your employer.

If you consider a career change, consider employment that is less demanding and stressful, and provides more satisfaction even if it pays less. Review carefully employee benefits provided by your new employer, as they can be a valuable source of coverage for dental and health care.

Unforeseen expenses

Unforeseen expenses such as major renovations or medical issues can be quite costly. There is also the possibility of having to take care of family members in need: aging parents requiring assistance and children coming back to the nest, and the time and expense associated with it.

 The best way to deal with this is to keep an emergency fund, held in liquid investments to cover types of expenses that could apply to you.

Estate preservation

You may want to leave significant funds to your family, children or a charity. If you live much longer than expected and your later years require significant expenses such as long-term care, your planned bequest may fall short of your heirs' expectations. Also, the estate can be depleted further by taxation if not properly planned.

You can address this by living below your means so that in any case you will have a significant estate whether you live short or long.

You can also follow a conditional approach: a planned amount if you live a good lifespan, and a lower estate if you live longer, recognizing that the primary purpose of this money is to provide retirement income. The estate value is a moving number that depends on your longevity (and your spouse's longevity) and future investment returns, two unknown variables.


The liquidity risk is the risk of not having funds available or having illiquid funds for unforeseen expenses. It is relatively easy to manage.

As time goes on, we can dispose of illiquid assets such as real estate, guaranteed income certificates and segregated funds, and keep funds invested in equity and fixed income funds or ETFs. These types of investments are fully liquid and can be traded for cash easily.

Business risk

The risk of the cessation of operations of a financial institution and the adverse impact on insurance or investment products owned by the investor. You can guard against this by investing in funds or securities that are separate from the financial institution's assets. Also, you can keep funds invested at a particular financial institution below the Canada Deposit Insurance Corporation limit.

This can also occur if you are in an underfunded defined benefit pension plan of a company going bankrupt. Pension plans subject to the Ontario pension jurisdiction provide income protection, but it is of limited value. While there are few recourses in such situations, pension legislation, Government monitoring and oversight by actuaries provide a strong safety net to ensure that pension plans are well-funded.

Risk of bad advice, fraud or theft

Americans has Bernie Madoff, and Canada has Earl Jones. There are a host of others. Risk of loss resulting from purchasing products or investments that are in a fraudulent operation is unfortunately too common.

Get advice from qualified and trustworthy sources. Only buy investment products that are commonly traded from a reputable company. Avoid investment products you don't understand fully, are illiquid or too good to be true. Get several opinions on important issues. Be cautious in giving control of assets to anyone you don't trust completely.

Even if the investment products are legitimate, you must evaluate if the seller has a conflict of interest, with respect to compensation. Ask for disclosure on commissions, sales charges and early withdrawal penalties.

Public policy risk

Personal income tax may increase or government pensions or health care benefits may be reduced in the future. The baby boomers are a powerful demographic at the polls and this will keep inter-generational transfers going for a while, but there will be a time where costs become so high that they won't be sustainable. This means there is a good chance of increases in income tax or reduction in services and payments. Either way, we will be left with less disposable income.

Grey divorce

Planning retirement involves both spouses of a couple, even if one retires before the other. If a change occurs in marital status, then the plan has to be redrawn based on each spouse going forward with its share of the family assets. Being single again means that a lot of expenses previously shared will have to be assumed by each, such as housing, car, vacations, etc.

Systemic risk ("Black swan")

I haven't spoken about the  so-called "Black Swan" or systemic risk, the risk of a pronounced secular downturn in the economy and in capital markets. I will dedicate a separate post to this in the near future and one to medical costs as well.

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RetireWare is a Web-based risk management and retirement planning software for individuals and financial advisors that's easy-to-use, full of rich visuals and comprehensive analysis. Try today and take advantage of our unconditional money-back guarantee. Know how much retirement income you can have. Build a plan and know where you stand.

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