Episode 281: Lifecycle Asset Allocation, and Retiring Successfully with Justin King
Today, we take a closer look at asset allocation through an empirical lens, by drawing on the work and data of Scott Cederburg and his new article ‘Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice’. We unpack what the research tells us about how to establish the optimal mix of assets in a portfolio, the challenges of making the right decisions when you have volatile assets, and why it’s critical that you understand your level of risk tolerance. Next, in our Mark to Market segment, we unpack different types of insurance — like life, disability, and critical illness — and when you should own them personally versus making them the property of your corporation. We then review Justin King’s new book The Retirement Café Handbook: Nine Accelerators for a Successful Retirement before sitting down with the author himself to discuss the content of his latest work and his long-held interest in helping others optimize for retirement. Tuning in you’ll hear Justin share his thoughts on the role of choice, vitality, and joy when it comes to having a successful retirement, the nine accelerators he lays out in his book, and how to become the hero of your retirement story. In our final section, we wrap things up with some wonderful reviews from listeners and our book recommendations. To hear all of the captivating takeaways from today’s episode, be sure to tune in!
Key Points From This Episode:
(0:02:12) Breaking down asset allocation through an empirical lens; finding the right mix of assets in a portfolio, common challenges, and measuring risk.
(0:09:10) The role of government pensions when considering asset allocation over one’s life.
(0:11:27) Investigating whether volatility is risk; modeling the lifecycle of an investor and determining if (and when) it makes sense to shift into bonds over time.
(0:14:02) Analyzing the data, modelling, and findings from the paper, ‘Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice’.
(0:23:10) The challenges of behaving well with volatile assets; advice on how to assess your risk tolerance, your ability to endure short-term declines, and more.
(0:29:50) Our Mark to Market segment: unpacking different types of insurance and when you should own them personally or inside your corporation.
(0:37:58) A quick look back at our conversation with Dr. Anna Lembke on the subject of dopamine.
(0:39:33) This week’s book review: Justin King’s The Retirement Café Handbook: Nine Accelerators for a Successful Retirement.
(0:41:19) Our conversation with Justin King on how to retire successfully.
(0:45:44) Unpacking the nine accelerators in Justin’s book and where they come from.
(0:55:47) How to get the most out of The Retirement Café Handbook.
(0:59:28) Sharing some of the wonderful reviews we’ve gotten recently, plus our book recommendations.
Read the Transcript
Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.
Cameron Passmore: Welcome to Episode 281. Ben, we're in the homestretch for this year. It's unbelievable how at the end of the year is near, and we're working on the end of the year show, as always. I'll let you kick off in showing this week's episode.
Ben Felix: The homestretch makes it seem like it's a race. I'd rather time slow down.
Cameron Passmore: Oh, no kidding.
Ben Felix: A year just flew by. Can't believe it. The main topic for today is lifecycle asset allocation with a fresh perspective is what I would call it. Scott Cederburg has a new paper on this topic, so I'm mostly talking about that, but a few other things too. I think it's pretty interesting segment. Definitely has me revisiting how to think about asset allocation.
Cameron Passmore: That's cool.
Ben Felix: We have Scott booked for later this year, so he'll be on to talk about this paper that I'll be referring to. But anyway, you get a taste of it today. Mark is back with the Mark to Market Segment. He's going to be talking about the different types of insurance; life, disability, and critical illness. And he's going to talk about which ones you should own in your corporation for a Canadian with a corporation, versus owning the policy personally. And he's going to talk about some of the tax and other considerations that will drive that decision.
Cameron Passmore: Awesome. We're also going to be joined for this week's book review by fellow financial planner Justin King from the UK to talk about his book. The Retirement Cafe Handbook: Nine Accelerators for a Successful Retirement. Then, we're also going to look back at Episode 177 with Dr. Anna Lembke, author of the book, Dopamine Nation. Of course, love the after show for the three of us to stick around.
Ben Felix: I hope it's not the three of us. That's like me, you, and [inaudible 00:01:59].
Cameron Passmore: [Inaudible 00:01:59]. Well, five of us to stick around. Cool. Anything else, Ben to add?
Ben Felix: No, that's good. Let's go to the episode.
Cameron Passmore: All right. Let's go to Episode 281.
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Cameron Passmore: Okay, Ben. Let's get going with episode 281, and you've got a great, but sounds a pretty fresh, interesting perspective on age-old topic.
Ben Felix: Yes, I think so. When we're talking about life cycle asset allocation, and we're going to be looking at it through an empirical lens using Scott Cederburg's data that listeners are hopefully familiar with from when he was on as a guest. So here we go. So asset allocation, as our nerdy listeners know, is one of the most important drivers of long-term investment outcomes. So choosing the right asset allocation policy for your portfolio is super important. Mathematically, optimal asset allocation is really hard to solve, because optimization models, like mean-variance models are highly sensitive to assumptions about future returns, and correlations, and volatilities, which are all unknowable before the fact.
Instead, what people tend to do is use rules of thumb, like their age minus 100, and stocks, or they just use a target-date fund, like a single decision fund that changes its asset allocation over time to match your life stage, shifting from stocks to bonds over time. That's how people typically solve that problem, because it is a really complex problem to solve. So if there's an easy solution, people will tend to take it. Now, those solutions like the age minus hundred in stocks, or hundred minus age in stocks, or the target-date funds. Those solutions seem sensible, given the perception that portfolio risk, we're measuring risk and volatility there. Portfolio risk should decrease as retirement nears and progresses.
But that logic, that shifting into bonds decreases your risk. I think that may sit on false assumptions, which is what Scott's empirical work challenges. Asset allocation is the mix of stocks, bonds, other assets that make up your portfolio, and different assets are going to have different return characteristics, and they're going to tend to interact with each other in different ways, like stocks and bonds not moving up and down in lockstep. So finding that right mix of assets in a portfolio is important. It's kind of like there's the idea that your asset allocation is going to drive a lot of your outcome. So it's important from that perspective, but then the portfolio characteristics that you're going to get are also going to be driven by your asset allocation.
From whatever angle we want to look at that, this is an important decision. Now, in the mean-variance portfolio theory, there is this mathematically optimal combination of risky assets based on the expected returns, expected volatilities and correlations. It's super tempting to use mean-variance optimization to build or attempt to build optimal portfolios, but it has some practical problems. It is highly sensitive to his inputs like I mentioned earlier, which are unknown future values. It only considers mean expected return and variance. But other return characteristics like return skewness and covariance with non-tradable assets are probably relevant to some investors, to most investors.
The other mean-variance issue is that it operates in a single-period framework, while most investors are concerned with multiple periods. In mean-variance, you care about your area, like your volatility, your single period volatility. But long-term investors, which people may remember from our episode with John Cochrane, or John Campbell, or both, or Robert Merton.
Cameron Passmore: I'm going to say Bob Merton as well.
Ben Felix: Pretty good name drops there, I don't know. People might remember that volatility for a long-term investor is not necessarily the best measure of risk. The other thing is that non-tradable assets in the mean-variance framework, they don't really show up. That's like, I guess, the covariance piece, you don't get the covariance with your labour income. But even beyond covariance, your human capital is not considered as an asset. In most mean-variance models, I guess you could try and model it.
When you factor in labour income, and multiple time periods, most models are going to suggest optimal portfolios that contain a mix of stocks and bonds with the allocation to stocks decreasing as people age. That's where we get rules of thumb, and that's where target-date funds get their allocations from. That advice, that your portfolio should get more conservative, conservative measured by the allocation to bonds over time is super consistent across finance textbooks, personal finance books, industry courses, surveys, if you ask people what they think individually. Everyone kind of has the same view on this for the most part.
Then the other place where it shows up is in default investment options for retirement plans, mostly in the States. I don't know if we have – it's just generally less prevalent in Canada. There are still, I think, they're called LifePath funds that I've seen in some group plans, then in target-date funds is the other place where this idea shows up in a really big way.
Now, fundamental to that advice, that your portfolio should get more conservative, more conservative measured by the allocation to bonds over time is the idea that volatility in returns measures the risk of an investment. Now, risk is a complex topic. But what I'm going to argue here, largely based on Scott's paper, I guess. We've talked about this before. It's got some new paper. It's not the first time we've talked about this idea. For most investors, volatility is definitely important, particularly from a psychological perspective, or if you have a short time horizon. But for long-term investors, which most people are, people tend to think that when they retire is the end of their time horizon. But people can live for 3040 years in retirement, depending on when they retire and how long they live. What's one of the things that comes up in Scott's paper too, longevity risk?
But anyway, people have typically very long-time horizons, unless they're very old, or terminally ill or have a very specific objective in the near term that they're going to spend a lot of money on. A lot more investors than they might think if you ask them are long-term investors. For long-term investors, volatility is more important psychologically than it is objectively or measurably. It's probably not the best measure of risk, and it should not be the only measure of risk considered when you're thinking about how much risk you're taking.
I think risk should be measured, at least in part, at least this lens should be used as the probability of not meeting your future consumption goals. We look at that when we do financial plans. We're not building clients portfolios based on the volatility of the portfolio. That's one thing we think about, but we're also looking at a model of, will you be able to achieve your long-term consumption goals. I think that's a better lens in general to look through.
Cameron Passmore: Yes. That's [inaudible 00:08:57] Ken French say as well.
Ben Felix: One thing I want to mention here, just when we're thinking about asset allocation over the lifecycle is the role of government pensions, not government employee pensions, but just the government pensions that a lot of people pay into. Like in Canada, we have the Canada Pension Plan. In the United States, they have Social Security. Those are meaningful assets. So when you think about transitioning your portfolio from stocks to bonds over time, most people that are working regular jobs and earning a salary are paying, at least in Canada, pretty sizable amounts into their government pension plans.
These things are as close. I mean, I'll speak for the Canada Pension Plan, I guess. I know people worry about Social Security. I don't know enough about it to comment. But in Canada, CPP is in good shape, and it is an asset that gives you an inflation-indexed annuity. It's an income stream, adjusted for inflation, that's around until you die whenever that may be. That's as close as it gets to a risk-free financial asset. I mean, it is. That is the risk-free financial asset.
Now, in Canada, in 2024, 11.9% of your first $68,500 in salary is going to go toward Canada Pension Plan contributions. That's a contribution from you and from your employer. But there's really no separation there. Because like, if your employer didn't have to pay their half, they would probably just pay you a higher salary anyway, so it's still coming off your salary, like that's part of your total compensation. So 11.9. That initial CPP is designed to replace 25% of your pensionable earnings. So 25% of the 68,500. And then starting in 2024, we're also going to be making in Canada additional contributions to the CPP enhancement, which when it's fully in place in 2064, will increase the replacement rate on CPP to 33% of your pensionable earnings, still up to a cap, which is around $24,000 in today's dollars.
Cameron Passmore: It's real money.
Ben Felix: No joke, it's real money. I didn't do this, I didn't capitalize it, and look at what is the value of that in present value terms, but it's a big asset.
Cameron Passmore: It's a big asset, for sure.
Ben Felix: It's a big chunk of cash. All that is just to say that, if you're not shifting your portfolio toward bonds, your market asset portfolio into bonds over your life cycle, you are still accumulating this safe, fixed-income asset if you're contributing to government pensions. That's somewhat of a tangent, but I thought it was an important thing to mention. Maybe people will understand once they have the context of what I'm going to talk about next. Back to the idea of whether volatility is risk. A big thing that it depends on is how volatility is related to expected returns.
If your stock portfolio drops by 20%, it's going to hurt, you're going to feel sad, it's not going to feel good. But if your portfolio is expected return increases when the portfolio drops, it may not actually affect your ability to fund your future consumption if you're a long-term investor. Twenty percent drop hurts the person who needs their money today. But if you need your money in whatever, 20 years, or if you're going to spend it down slowly over 20 years, the increase in expected returns can offset the drop in prices. It can, like we talked about this with bonds, talked about how our clients, future consumption liabilities had longer duration than their bond portfolios.
When interest rates went up, yes, bond prices fell. But our client's financial plans actually looked better. The same thing can happen with stocks or bonds. He asked if it has some predictability in its expected returns. That highlights a key difference between the single period investor who cares about the single period drop, and the multiperiod investor who cares about how the drop impacts expected returns. It is the case empirically, and again, this is something we talked about with John Cochran and John Campbell. It does seem to be the case that expected stock returns increase when stock prices fall. There is some of that mean-reverting behaviour going on. That likely reduces the risks of stocks for long-horizon investors. But importantly, they still have to live with the year-to-year, day-to-day volatility in their portfolios. The interesting empirical question that follows from that is whether stocks provide better outcomes, and bonds, and cash-in asset allocation for long-term investors as they save for, and then pay for their retirements. If we model the lifecycle of an investor, does it make sense to shift into bonds over time?
As most people, I think it's safe to say, think that you should. One of the keys to answering this question, empirically, is dealing with the limited amount of data available on asset class returns, while maintaining important characteristics of returns, like the aforementioned, mean reverting tendencies of stocks, which are increasingly important at longer horizons. For modelling the full lifecycle of somebody from when they're 25 years old, until the end of their life expectancy, we're dealing with a lot of years. And any mean reverting tendencies in stocks are going to be more important that those horizons than they would be at a five-year horizon.
This new paper, article by Cederburg and O'Doherty titled Beyond The Status Quo: A Critical Assessment of Lifecycle Investment Advice tries to take on this challenge. Of course, listeners hopefully remember Scott describing his data and how they set it up. So I'm not going to spend too much time there. Go back and listen to this episode if you want to hear more about it. They model the lifecycle of a US couple, who saves 10% of their income during their working years, and consumes during their retirement years. They begin to save a portion of their monthly income at age 25. In the model, it is possible for their income to be interrupted, so they can lose their job, or something like that, at which time, they will stop saving.
Then at age 65, they retire and begin to draw on Social Security, and to draw down their portfolio. They have uncertain longevity, which is modelled using the Social Security mortality tables, and they leave an inheritance upon the passing of the second spouse. They use the 4% rule for their portfolio withdrawals, which we know to be suboptimal. But from the perspective of modelling it, it's clean. The reality is, a lot of people are actually doing that, even though it may not be [inaudible 00:15:16]. A topic for another day, though.
To model asset returns, they use their dataset, which is, got domestic stocks, international stocks, bonds, and bills, and it spans 30 developed countries and nearly 2500 years of country month return data. Then, they assess multiple lifecycle asset allocation strategies using that data to simulate a whole bunch of possible return experiences. I think they do a million simulations.
Cameron Passmore: Wow.
Ben Felix: Their block sampling method, and I know I said, I wouldn't talk too much about their data methodology. But their block sampling method, they do a bootstrap simulation. But instead of just pulling like single-month observations, or single-year observations, they're pulling blocks of returns, so that you can maintain some of the mean reverting tendencies, and other characteristics of actual stock returns.
Cameron Passmore: That's interesting.
Ben Felix: That's one of the cool parts of their data setup in general. Now, the results, which, unsurprisingly, if you heard the title of the paper, challenging the status quo, the results, challenge the status quo of lifecycle asset allocation. Because rather than the traditional equity glide path, which is represented by a target-date fund, or 100 minus age in stocks kind of strategy being optimal, they find that a portfolio of roughly 50% domestic stocks, and 50% international stocks is optimal for the full lifecycle. So you're not changing your asset allocation, there's no glide path. They find that a 50:50 domestic-international stock portfolio is optimal, measured by its ability to accumulate wealth, improve consumption throughout retirement, and leave a bequest at death.
Cameron Passmore: And it's no fixed income, you're saying all equity?
Ben Felix: No fixed income. I'll talk more about the no fixed income piece later, because there's another angle they look at, for should we have some fixed income in the portfolio. I've also got a little note on limitation, so I'll just say it now. They're using 10-year government fixed income as a proxy for bonds. We know there's a credit premium. We know there's a term premium, including those premiums in the model affect the advice that comes out of the analysis. I think that's very possible. We can't know obviously, because we don't have those data going back as far as they're looking at in this paper for their sample. But that's not conclusive. But within this model, the findings are very interesting, and we're thinking about – the starting point there is 50% international, 50% domestic.
They did look at reducing the domestic weight to 35%, because the comment was basically, 50:0 is not bad for a US investor. That's probably a very reasonable portfolio. But for someone ex-US, like someone in Canada, where Canada's 3% of the global market, maybe they don't want to be 50% domestic, 50% international. So they did look at lower weights, and reducing the domestic way down to 35% actually produced small performance improvements. Small, but still, they were there. But going further than that, so reducing domestic stocks further than that actually caused performance to deteriorate on the metrics that they were looking at in the model. They talked about this a little bit in the paper, but it suggests that someone in Canada, for example, despite our 3%, whatever it is representation on the global market cap, we should still have a significant home country bias.
What drives that? I don't know if that's discussed in the paper. I tried to find it, but didn't see it. But that's something that I definitely want to ask Scott about when he comes on. Why would it be that such a significant home bias is empirically so beneficial? But in any case, it's some very nice confirmation bias, because that's about what we do, a third in Canada, so I'll take it. From the perspective of retirement wealth accumulation, they find that portfolio, the 50:50 all-stock portfolio outperforms target-date funds, balanced portfolios, age-based asset allocation strategies, and cash on mean, median, and 10th percentile outcomes. This isn't even like on average, it's better, but there's a worse left tail. No, the left tail is also better, which is kind of crazy.
Cameron Passmore: Wow.
Ben Felix: I know. So on wealth accumulation, I don't think anybody would be surprised to hear that. An all-stock portfolio beats a balanced portfolio, for example, on expected wealth accumulation. I don't think that's a terribly surprising finding. The more surprising result is that all stock portfolios continue to produce better outcomes throughout the retirement period. So they produce better income replacement rates on average, which is partially a function of the greater wealth accumulation, but they also produce better left-tail outcomes for retirement consumption. But in both cases, I forgot to mention this actually, on the accumulation side, both an accumulation and decumulation. Better on all metrics. So better on wealth accumulation better on spending, and better on retirement consumption in the left tail. Not just on average again, but also in the left tail.
But in both cases, much bigger drawdowns. The all-stock portfolios have much bigger drawdowns than bigger drawdowns. I don't know how much probably isn't fair, but the average drawdown in the stock portfolio is larger than it is in the balance the target-date, or the other alternative asset allocation strategies. That's a real consideration because people do struggle with volatility and they do struggle with drawdown. I don't want to minimize that, but there it is. So better results, but you got to live with the drawdowns.
Another interesting point that I alluded to this earlier, is that the all-stock strategies look increasingly – their advantages increasingly pronounced at longer lifespans. The probability of ruin for the longest-lived couples is much lower for people with all-stock portfolios, tha it is for people with, for example, target-date funds. The higher expected returns of stocks effectively provide somewhat of a longevity hedge, I guess is the takeaway there. The all-stock portfolio also dominates the other asset allocation strategies on the bequest amount, on average, and again, in the left tail, the right to the lifecycle. Accumulation consumption bequest on all stock portfolio, dominates a portfolio with some bonds in it.
Another really interesting perspective they look at is the equivalent savings rate that an investor would need to maintain the same expected utility, or like the satisfaction, I guess, in retirement. Taking a 10% savings rate into a target-date fund is the base case. So let's take the base case, as this couple. They're going to start saving at age 25. They're going to put 10% into a target-date fund. Then, we want to see if we used a different asset allocation strategy, as opposed to a target-date fund, how would that affect how much of the income you would need to save to achieve the same level of retirement utility? These data points are pretty crazy.
Relative the target-date fund, if you instead allocated 100% to high interest savings accounts, or to bills, money market funds, that cash yield kind of thing, you need to save 50% of your income to achieve the same retirement utility as someone using a target-date fund, saving 10%.
Cameron Passmore: That one is not too surprising.
Ben Felix: No, no. Yes, not too surprising. Another reason, though, that cash is not so good for long-term investors, which is something we've talked about in past episodes. Now, switching from the target-date fund to the 50% domestic, 50% international stock portfolio, that reduces the required savings to 7.2% of your income. Again, holding expected utility constant. It's the same retirement utility, but you're reducing your required savings amount from 10% to 7.2% of your income.
Cameron Passmore: That's meaningful.
Ben Felix: It is. Okay. Then, they also looked at from a mean-variance perspective, you would expect adding some bonds to a portfolio of stocks to be optimal. That's some diversification benefits. They looked at, what if you just added 5% or 10% in bonds to this globally diversified portfolio. Even that results in underperformance in all of the metrics that are being considered. Pretty conclusive within this sample, specifically, pretty conclusive within the sample. The intermediate government bonds are not doing too many favours to long-term investors.
Now, I think a really important point though, is that these data are very fun and compelling. But there is an important constraint that most of us have, which is our ability to behave well with volatile assets. As I mentioned earlier, the all-stock portfolios in this sample do have the largest average drawdowns of all the different asset allocation strategies. The gap between investor returns and investment returns, like if you look at how did the fund do, versus how did investors in that fund do, using time-weighted and dollar-weighted returns to make that comparison. Investors tend to lose depending on the sample. I found a bunch of papers on this actually, but it's around 2%, about 1.5% to 2% in market index-type portfolios or just in equities in general. But that behaviour gap, whatever you want to call it, that gap increases significantly with increasing volatility in the assets. All fine and good to say, 100% stock portfolio is better, but investors may not be able to stick with it. Empirically, they seem to lose more of their returns to inopportune timing decisions.
I think assessing how much risk you can take involves, broadly speaking, I mean, this is a whole other topic we could do an episode on. But you've got to look at a psychometric assessment of your risk tolerance. There are some pretty cool psychometric tests available to do that with. You've got to look at your capacity to endure short-term declines. If you put all of your money into 100% equity portfolio, but you're planning to buy a house in cash tomorrow, probably not a good idea. That's a capacity question. To endure whatever the income interruption example that we talked about in their model. You've got to also think about your composure, which is how have you behaved during past experiences market volatility.
People have very different reactions. I know some people get very stressed out, anytime the market's volatile, and I know other people who don't worry about it in the slightest.
Cameron Passmore: Ken did talk about that. But when there's market events like that, there's always a story that goes along with it. So it might not be the portfolio numbers, it's the news of the day that causes the concern or fuels that concern.
Ben Felix: Everyone is different, every decline is different, because the story is always different, and you got to be able to live with that. Keep in mind, the data set we're looking at is massive, both in its time series, but also in the countries and events. Think of the world events that have occurred in the data series that Scott's using to do this modelling. You can't even imagine. We always hear the word unprecedented get thrown around, but you look at what's happened throughout history. There's a lot of wild stuff been happening.
Cameron Passmore: Twenty-five hundred years you said of country month return data.
Ben Felix: That's a huge assembly of returns from a whole bunch of different countries, and lots of major events, and obscure events that would have affected people's psyches have occurred in that time period. But in any case, people have to be able to stick with their portfolios. But if that performance gap is 4%, I'd be curious to ask Scott if they can model what is the breakeven on the behavior gap in stocks that would make adding bonds to the portfolio attractive. If investors expect to lose 2% to the behaviour gap and stocks, how much would that earn bonds allocation in the portfolio, assuming. That's assuming, of course, the bonds don't have a behaviour gap, which isn't true. So you have to model a relative behaviour gap, something to think about.
Now, financial advisors do seem to increase participation in the stock market, and to boost the share of stocks and investors portfolios. That's worth considering. We just talked to you Juhani Linnainmaa about his research on this. Trust in a financial advisor may also reduce the perceived riskiness of risky investments, like stocks, and allow risk-averse investors to earn higher expected returns with an advisor than they would have on their own. Then again, Juhani also talked to us about how longer duration client relationships with a financial advisor, which they used as a kind of proxy for trust in the relationship, increases client's willingness and ability to take risks with their investments, and not bail out, and they used the great financial crisis crash as an event study there.
It's common to hear people say like, "Oh, you don't need financial advice, because everyone should just buy index funds," which is kind of true, but a lot of people don't do that. But it is worth saying, that like financial advisors are not always a solution. It's important to watch out for high fees, conflict of interest, which can easily offset any of those benefits. I mentioned the limitation on the fixed income series that they were using. Also, equity factors, like this is just using cap-weighted equity funds. But what would adding a value portfolio into the simulation look like? My guess is, value stocks would look pretty good, but I don't know.
Also, inflation-protected bonds could improve the outlook for adding bonds to a portfolio. But in Canada, those are being phased out right now, so I don't know how interesting that actually is as a point of discussion. They've got tax inefficiency quirks too. But anyway, worth mentioning. Mostly, it's so contrary to traditional portfolio diversification, and lifecycle investing advice. Empirical evidence drawing on data from a huge survivorship bias-free sample of stock and bond returns, suggested a portfolio consisting of domestic, and international stocks with a home country bias for non-US investors, dominates balanced portfolios, age-based strategies and targeted funds on accumulation consumption and bequest objectives.
This research has definitely made me think a lot about asset allocation over the lifecycle. It does have some limitations that I just mentioned, looking at government bonds, and cap-weighted stock indexes. It's also ignoring the fact that human investors still need to deal with the constraint of our own behaviour in the face of market volatility and drawdowns. But overall, I think some pretty interesting stuff to think about.
Cameron Passmore: On behalf of the listeners, Ben, that was awesome.
Ben Felix: I'm glad to do that.
Cameron Passmore: I know people are going to love that segment. People, it's worthwhile going back and listening to the past episode with Scott Cederburg, because that does dovetail into this beautifully, and you set up our upcoming conversation with him perfectly. This is a great and fascinating topic.
Ben Felix: It really is. Like the title of the paper says, it's challenging the status quo, it's really asking that question of, is it sensible for people to reduce their allocation to stocks over the lifecycle. It may not be.
Cameron Passmore: Love it.
Ben Felix: Okay. Shall we go on to this week's Mark to Market Segment?
Cameron Passmore: Let's do it.
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Cameron Passmore: Mark, what are you bringing for us today?
Mark McGrath: Today, we're going to talk about insurance. We're going to talk about different types of insurance, and we're going to talk about whether you should own them personally, or inside your corporation if you're a small business owner or an incorporated professional.
Cameron Passmore: Love it.
Ben Felix: Great question.
Mark McGrath: I didn't get the memo about the mauve hoodies this morning, so I'm wearing my blue. I'm upset. I do have a mauve that I can wear next time, if you give me a heads-up.
Ben Felix: That's okay, you look good.
Mark McGrath: Oh, thank you.
Cameron Passmore: We'll do a better job of coordinating our wardrobes.
Mark McGrath: There you go. Good. Let's get into it. Life insurance, disability insurance, and critical illness insurance are the three primary types of insurance outside of property, and casualty, and liability insurance, and that type of thing. When you have a corporation, there are certain situations where you might want to hold these types of insurance in your corporation, and other situations where you might want to hold them personally. I just want to explain a little bit about the differences in the types of policies, and why you might want to hold them in your corporation or personally.
Before we get into the actual individual types of insurance, the reason you might ever want to do this, hold it inside a corporation is because you can take advantage of paying the premiums using pre-tax dollars, or at least dollars that have only been taxed by the corporation, usually at a small rate. So if we think about somebody who's in the top personal tax bracket has a corporation, and let's say their life insurance premium is say, $100 a month. If they're in the top tax bracket for them to earn $100 after tax personally, depending on the province, they're going to have to pay themselves, let's call it, $200 personally, pay 50% tax on that, ballpark. Then, they're going to have $100 left over to pay the insurance premium.
But if your corporation owns it, your corporation generally is going to have to earn a lot less. If you're getting small business income that's taxed at the small business rate, your corporation might only need to earn say $110 or $115, pay the tax, and then still have that same $100 after tax to pay the insurance premium. So you're taking advantage of pre-tax or cheaper dollars to pay these premiums. Now, with life insurance, that's usually a good thing. You corporation would usually own the life insurance policy, your corporation becomes the beneficiary of that life insurance policy on your life as well. When you pass away, if that insurance payout takes place, it'll go to your corporation.
But there's a mechanism there called the capital dividend account, and this is not like an account you open at a bank. It's a notional account, meaning, really, it's just on paper, and the life insurance payout, most of it or all of it, depending on the type of policy, and a couple of other things can come out of the corporation to your survivor tax-free. Even though you've used these cheaper corporate dollars to pay for those premiums, the end result is still for the most part a tax-free death benefit out to your beneficiaries.
In most cases, you would want your corporation to own your life insurance policies. The only downside there is, it can take a little bit longer for your survivors to get the actual payout. Like if you own it personally, and you pass away, the survivors can access that death benefit really, really quickly. But if it's owned by your corporation, and your corporation has to go through the probate process, and change directors, and everything, that can take some time. So in cases where there's other assets that can be accessed by a spouse, like if you have maybe a TFSA that you're leaving to them, or some non-registered investments, or cash, and they're going to be okay waiting for that death benefit, then life insurance can be owned by your corporation, and that's usually a good thing. The second one is disability insurance, and disability insurance is a little bit different.
With disability insurance, if you become disabled, your disability policy is going to pay you an income. So it's not usually a lump sum, it's a monthly income. If you own it personally, and you pay the premiums personally, if you make a disability claim, the income that you receive is tax-free, and that's one of the major benefits. If you have a, say $7,000 a month in disability income and you've been paying those premiums tax out of your own pocket, not the corporations, then that $7,000 a month is tax-free. That's ideal. But if your corporation owns that policy, or if your corporation pays the premiums for that policy, then it's usually a taxable benefit. So, that's often suboptimal.
I mean, if you've got, let's say, $7,000 a month, same thing, you've used those cheaper corporate dollars to pay for those premiums. But when the money lands, when you make that claim, it's fully taxable. Now, that might be okay. I mean, the thing is, it's a bit of a balance, it's a bit of a trade-off. If you're using these cheaper corporate dollars, you're hoping you don't actually get disabled, you're hoping your best-case scenario is you never have to make a disability claim, and then you're able to pay for it with cheaper dollars. But at the end of the day, it's there to protect you from something and you probably don't want that income to be taxable to you. So generally speaking, you don't usually want your corporation paying for the disability policy. Makes sense so far? Pretty straightforward?
Ben Felix: Got you. Interesting to think about. I'm just thinking of the disability while you're paying personal tax on the income from the corporation, so that you don't have to pay tax on a possible disability claim, but it's kind of asymmetric. Like if you had to make a disability claim, the amount of tax you would pay, if you had it in your corporation, as opposed to personally would be much larger than the tax you'd expect to pay by paying the premiums personally.
Mark McGrath: Well, not only that, but you can only insure yourself for disability up to certain percentages. It depends. Just to give you an anecdote, I have a client, he makes about $350,000 a year. He's a salaried physician. The most we could get him approved for was $14,000 a month. That's about, call it half of what his actual income is, but that's tax-free. So that actually gets him relatively close on an after-tax basis to that $350,000. But if his disability policy of $14,000 a month, if that was taxable, then the gap between his current after-tax income, and the after-tax disability income if you were to make a claim is actually pretty significant. Especially for higher-income earners, having that disability benefit be taxable is going to leave a much larger income gap after tax.
Then the last one is critical illness. The answer here is, maybe. Do you want your corporation to own the critical illness policy? The answer is maybe. So life insurance, probably yes. Disability insurance, probably no. Critical illness, maybe. I say maybe, because often, it depends on the type of business and the reason that you bought the critical illness policy. I work with a lot of physicians, and most of the time, they're just a single shareholder of their own medical corporation, depending on the specialty. They don't often have a ton of overhead. If something happens to them, and they get a critical illness, and need to make a claim, it's usually them personally that needs that money. It's not their business that needs the money. It's them personally that's going to need access to those funds. That's a tax-free payout as well in that case.
If you own that critical illness policy personally, you pay the premiums personally, and you get paid out, it's after tax, so it's tax-free. But there are some types of businesses where what you're insuring against is the concern that a key person, or key shareholder, or key employee, if they get a critical illness, it's actually the business that might need an injection of capital. Maybe the business then needs to go out and hire head-hunters to replace them or something like that. In those cases, it might make sense for the business to actually own the critical illness policy.
Where there can be a disconnect is that if you actually need that money, personally, not the business, but the business owns that policy, and gets the payout, the money goes tax-free to the corporation. But then, for you to access it, you have to pay a dividend to get that money out, and that becomes taxable. So you want to think about the ultimate destination for where that critical illness payout needs to go before structuring the policy either personally or corporately. That's about it, it can get a lot more complex. There's a lot of other riders and features that you can add to many of these policies that might change some of the math or change some of the strategies on them. But I think at a high level, if you're thinking about insurance, and you have a corporation; life, probably yes. Disability, probably no. Critical illness, it depends.
Ben Felix: And in all cases, you have to think about what your objectives are. Because even in the life case, if you need immediate liquidity, death, for whatever reason, you could even have a small policy for that reason, personally. And then the rest in the corporation or something like that.
Justin King: I have a client who's done exactly that. The majority of the larger life insurance policies held by the corporation, and they've got a small one personally, for the reasons you just described.
Cameron Passmore: It's good point.
Ben Felix: Interesting. You got to have like a framework to think through it. What are you trying to accomplish? What are the tax implications? And then you can come to a decision from that.
Justin King: That's exactly it. So it's always in financial planning, most of the time, it depends. I think that's a reasonable framework for at least a starting point on thinking how to structure things, but it's going to come down to your personal circumstances.
Ben Felix: Cool. Good segment. Good stuff.
Cameron Passmore: Love it. Great. Thanks, Mark.
Mark McGrath: Thanks, guys.
Cameron Passmore: All right. Mark, as always, it was awesome. Great to have him on. Let's go to our quick look back at a past episode in 60 seconds or less. Dr. Anna Lembke was our guest, Ben, back on Episode 177, back in November of 2021. She's a professor of psychiatry at Stanford, and author of the excellent book, Dopamine Nation: Finding Balance in the Age of Indulgence. Dopamine is a term that we've all heard of, but what is it? How does it affect us? How does our body regulate it? This is exactly why we invited Dr. Lembke to join us, and she clearly explained how our bodies regulate pleasure, and pain, and the role that dopamine plays in that balancing act. We also discuss what causes gambling to be addictive, how addictive is social media, whether working can be an addiction, and are there any positive attributes to addiction.
Then, she shared with us some strategies on how to protect yourself from the effects of this drive for dopamine, including how to stop addictive behaviours. At the end of the conversation, we actually talked about the impact that a dopamine-rich world has when we're making long-term financial decision. She suggested investing in the stock market is more like gambling than ever before. So this podcast is about decision-making for the long term, and understand the role of dopamine in that process is so important. That was Dr. Anna Lembke, back on Episode 177.
Ben Felix: She was fantastic and the book is fantastic.
Cameron Passmore: So speaking of books, let's pivot to this week's book review. It's on The Retirement Cafe Handbook: Nine Accelerators for a Successful Retirement by Justin King. So a bit of a backstory. As listeners know, I was in the UK a year ago, so the fall of 2022. I had a chance to meet Justin, who was an advisor over there, and he told me about his podcast, and invited me on actually. So I was on his podcast, The Retirement Cafe Podcast, Episode 169 in February of this year. He decided to write a book, his second book that takes some of the lessons from that podcast and turns into this workbook, which is really well done. The book just came out in the fall of this year.
Justin's based in Christchurch, England, and as a chartered financial planner, registered life planner, and created the firm, MFP Wealth Management, where he works with clients who are approaching or in the retirement stage of their lives. He's insanely curious about helping others achieve fulfillment in life. To hear that in this conversation with him, Justin's a pretty fired-up kind of guy, and really makes considering and planning for retirement really exciting. He's also the co-author of the book, Ready, Steady, Retire!: Plan Your Way to Success in a Redefined Retirement.
Also, has a YouTube channel, Justin_King. He believes the retirement landscape is changing, we're living longer than ever, which should be great news. But instead of grasping all the opportunities, a longer retirement has to offer, many people are just drifting into that stage of life, ill-prepared for the amount of time that they hopefully have ahead of them in retirement. The truth is, a successful retirement won't happen by accident, which is why he wrote this book. So here we go. Let's go to our conversation with Justin King.
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Cameron Passmore: Justin, welcome to the Rational Reminder Podcast.
Justin King: Thank you very much for having me.
Cameron Passmore: Great to see you again, and congratulations on your book.
Justin King: Thank you.
Cameron Passmore: I think the book is actually an incredible resource for anyone thinking about the retirement. Off the top, why did you write the book?
Justin King: I've had a podcast going out for the last four and a half, five years, called The Retirement Café Podcast. I realized that the more and more people I talked to, the more and more information it was out there. Then I suddenly realized that, if you were coming to this fresh, and you were suddenly like, "Oh, I'm thinking about retiring. I think I'll hook into this podcast. That sounds useful. Oh, my gosh, four and a half years of episodes, how the flipping act you get through all of that?" And then it distills down to the bits that you want to know about. So wouldn't it be useful to have in essence, a handbook, that corralled all that information, and that you could pick, and choose the elements that you thought were useful? Then, maybe, from that dive back into the podcast, and listen to those experts that were giving you value.
Ben Felix: That is a very smart idea.
Justin King: Thank you.
Ben Felix: We also have five years of podcast episodes that I'm sure are very overwhelming for people to dive into. But we have not written a book. Well done on that. Can you describe the pyramid of the four levels of retirement preparation?
Justin King: I think you're referring to the overwhelmed and the drifting, participating, and thriving in retirement, which of course, I think, what we really want to be. We want to be thriving and thriving in any part of our lives, I suppose. But I'm especially addressing this period of retirement to thriving. I think the overwhelming thing that we all can identify with maybe at some point of our lives of just kind of going, "You know, retirement? What on earth is that?" Maybe in our 20s, we're also thinking of like, "It's so far away. I don't even want to talk about it."
Sadly, that feeling does carry on for a lot of people, because it's complicated, I've got all these different types of retirement plans, pension schemes, what's the government going to give me? I don't really understand how that works. They seem to keep changing the rules. Life's busy enough for me to have to try and deal with something that is hopefully 30 years away, or 20 years away, and then suddenly, 10 years away. And then, "Oh my God, I'm there."
I think people do get overwhelmed, and then just kind of go, "Oh, it's a bit complicated." Then, we want them to move into that. Well, some people kind of drift along. I'm in my scheme, a workplace scheme. I'm in something, so I drift along with the river. As I move company, and I get into a new scheme, and I'm sure that's enough, and I don't really pay much attention to it. I know I'm in that default investment fund that someone's kindly chosen for me on my behalf.
We drift along. We meander along with the river. I want to go, "You know, hold on, let's take a bit of control. Let's move above this line, and really take some action." And then we get into participating, we kind of take some thought process about it, we kind of start to understand what our number is, what do we need to identify, and maybe when are we going to choose to retire. But I want to get people over that, this is the good enough line." I talked about Apple and Apple had said, "The iPod was good enough. Someone else would have invented the iPhone. We want to get right early." What would be an amazing retirement? I've got all the bits in place. I've got all the things I should consider to make sure that I really thrive in that part of my life. Talk about this, of course, this could be a significant part of your life, maybe even a third of your life. I've met people now who've retired for longer than they were working.
Cameron Passmore: You mentioned thriving, I thought you had a very good description of the key items that matter in a successful retirement. You boil it down to vitality, choice, and joy. Can you talk about that?
Justin King: I think it was listening to all of these wonderful experts who – I was trying to go, "Okay. How do I actually separate them out?" Because everyone has got a different angle, I suppose, on what an amazing thriving retirement would look like. And of course, for some, it's all about health, the vitality aspect to make sure that we are healthy for as long as possible. What's the science around there? What are the key considerations? For some, it's just – the whole main focus is all about the money. Have I got enough money to live on through that period of time? Or do I continue working? Or do I take a product and something else and be entrepreneurial in that point?
The vitality aspects is hugely about the importance of making sure that that period of our life is great. The choice is the ability to do things. And of course, joy, let's make sure this is a wonderful, wonderful time. Then, obviously, we've got these different levers as well to help kind of support the vitality, choice and joy.
Cameron Passmore: Love it. So your book focuses on the nine accelerators, as you call them. Before we get into them, and I want to go through them quickly, where did the idea of nine accelerators come from?
Justin King: All these different people were saying different stuff to me. There's not just one thing is there, that it's going to help kind of accelerate us up to make sure that we get to this fulfilling retirement, which is what my end purpose is. How do we get people to that point? Then, look at – what are the things that we can do, we can actually take action on, which is what I've called the accelerators. How do we make sure that what are the key components? If we were given the jigsaw puzzle to get to that fulfilling retirement, what are the key accelerators that would get us there quicker?
Cameron Passmore: All right. So let's go through them. One of them, one by one, because they're all very important. Number one, talk about redefining retirement.
Justin King: It's not what our parents' thought retirement was, and our grandparents. This is a significant shift, isn't it, of getting your pension and maybe not being here five years later. As I mentioned before, it could be possibly 30 years. So really just start to understand, what would you like your retirement to look like? Forget what the magazines, and the advertisers, the couple walking down the beach? Or the advertisers holding hands, et cetera. Say that it's all going to be about. Redefine what your retirement is going to be like. How do you find out what's really truly going to nourish you?
Ben Felix: Okay. The next accelerator, can you talk about having a purpose?
Justin King: Often, people can think of, "I'm retiring from something." I want you to retire to something. Actually, try and identify what is really going to be a wonderful thing. I talk about in the book, just imagine you are 90 years old, and you're sitting in your rocking chair, and you're maybe on your veranda, and the sun's coming down, and you're sipping your favourite cocktail. And you're just thinking, you know what, wow, what a period of life this was, how fantastic would that be? If you were going to bed tonight, and you turn out the light, and you just went, "Yes, I really, really did. I had a purpose for retirement. I really nourish myself. I really attained the things that I wanted to do."
Cameron Passmore: Number three, it's never too late.
Justin King: So many have inspired me. I always think about the people who start businesses in their 50s, and 60s, and 70s. They become entrepreneurial, they take up new skills. There was one lady we got in the UK called Iron Gran, Edwina Brocklesby. She, in her 50s, anyway, she said to her husband that she was going to run a 5k. He was like, "You can't even run for the bus." Then, before you know it, throughout her retirement, she's doing Ironman competitions. Amazing. As I say, never too late to take up something brand new. If you've thought of learning a language, or thought of learning a new skill, taking up the piano, doing art, whatever it is. I worked with somebody who I had just a really good conversation about, "What is it that you haven't yet got to do?" She told me that she always kind of thought she'd like to be a nurse. She's telling me this in her 60s. She'd wanted to do that in her 20s, but she had a family quite early on, large family, four or five children, and that had taken up her life. We've worked into her life, into her retirement, how she would now start caring for others.
Ben Felix: All right. Can you talk about the science of living better for longer?
Justin King: Well, the science is really, really helpful now. There's so many people who are real experts, and it's available to us all over the Internet now with YouTube, and podcasts, et cetera. And of course, books, about how we need to stay stronger, we need to nourish ourselves, we need to – what a healthy diet is. All the information is there. The living longer – what I also want about the living longer, this comes back to the vitality, and that self-care. Is, if we can really establish, and understand what will give us that vitality for longer, there's no point living another 30 years if it's really painful. Now, I appreciate there's an awful lot of people who are going to suffer stuff, and there's a little good that can be done.
But if there is things that you can do to make sure that you're living longer with health, then, get the knowledge and start to implement on those things. The classic thing that I'm a great fan of is, we know the significant muscle wastage as we get beyond 50. I am beyond 50. I spent an awful long time every day try and go and lifting weights, because we know that people have falls, and they have injuries, and then they get laid up in hospital for three or four weeks, and then they really never recover from that. We had lots of experts talk about that in the podcast, and I've redefined it in the book to make sure that we understand this, and then hopefully take action.
Cameron Passmore: The next one is kind of related, taking control of your health and well-being.
Justin King: It is that kind of flips over, doesn't it? First of all, you got to understand it. Second of all, you got to implement it. This is the classic thing of 20 cookbooks in the kitchen, and you've never cooked a meal. Okay. We've got all the knowledge, that's all out there for us in the science. Now, what do we need to do about it? How do we absolutely take action and do something? It is more than just a brisk walk. A brisk walk is brilliant, but it is more to it than that. Because there's all types of aspects to your health, of course, which is the social aspects of loneliness, being part of community, being part of something else. This comes back into the purpose aspect. Let's make sure that they were nourishing the whole of your life, not just the physical aspects of it.
Ben Felix: What is the big D?
Justin King: Dementia. The one we don't want to talk about, really, and we all probably know someone who's been affected by it, and we are kind of all terrified of it, aren't we? There's been great steps, huge steps made into dementia research, about what can be done to try and stave off the big D if it's coming to you. I've spoken to lots of researchers, and people can live with dementia for a long period of time and relatively well. It's not a death knell immediately of lifestyle, et cetera. But it is something that we can all worry about. There are things that we can try and do to stave it off. Also, if it does appear for your loved ones to understand it, and for you to understand it. Again, knowledge here is power.
Cameron Passmore: Number seven, planning for a 30-year retirement.
Justin King: Yes. Now, I always joke, the easiest thing as a financial planner would be, of course, if we all had a date stamp. We knew our sell-by date. Because that 30 years, well, first of all, have we got 30 years? That's the big question. We may only have three, but we've got to somehow plan for longevity. We've got a plan for this scenario where it could be possibly 30 years, it can be more, as I say. People who've retired for longer than they've worked. But that is the real tough puzzle of how do we counter inflation, how do we make sure our savings and investment last for those 30-year period.
Ben Felix: Which is a perfect transition into the next point, the role of investing.
Justin King: You guys cover this huge amount and are real experts at this. Again, I'm trying to get to the point of understanding where the biggest danger I feel facing any retiree for a 30-year period is our capacity to make incorrect decisions is huge. Once you stop working, your ability to recover from a mistake gets less and less. Therefore, you owe it to yourself, and your family to start to develop some understanding, with advice or without advice of what would make a successful investment experience. Because you make a mistake at this period of your life, it could be absolutely devastating. You're trying to counteract possibly the biggest fear, the biggest unknown, which of course, is inflation, prices moving. You're no longer possibly getting an increasing earnings that you've had throughout your career. You're trying to make sure that money lasts for as long as possible, and possibly for your partner as well.
Cameron Passmore: Well put. The last one, care in the end of life.
Justin King: It's probably not the top topic that everyone's really kind of looking forward to in their retirement, but it's a big thing. Just two aspects of it. Lots of people say, "Oh, gosh. I forgot to put me in a care home then." We have a line of one-way flights to Geneva here where you – with hand luggage only where you can finish off your days. But it's a big conversation for families. Where would you like to have care if you need it? Is it something most people would love to still be at home? What's the cost of that? How would you like it to be happening?
We get down to the actual practicalities of – if it happened tomorrow, would you know who to call? Who were the suppliers? Who are the providers? Who were the people around you that your family could know? Okay. This is what mum would want. This is what dad would want. These are the people we could call. This is how we would implement a care package, a care system and also the knowledge that you can hopefully pay for it.
Ben Felix: Can you talk about how people can, as you put it in the book, become the hero of their retirement story?
Justin King: I do believe that this wonderful period of your lives, if you've got to that period, where you're – you've got some financial resources behind you, it could be the greatest opportunity that you've ever had. Maybe your children now have left home, maybe you've now paid off the mortgage, and you go, "Oh my gosh, the freedom that I've created for myself, to now live into whatever dream that I've got. To be purposeful, to be useful, to be a contributor, to take on all those new skills as new ambitions, those new projects that you never possibly had time to do before. If you were writing yourself into that a wonderful movie of amazing retirement, what would that hero do?
Cameron Passmore: The way you describe that, Justin is exactly why I liked the book so much. The book is just so full of hope, and optimism, and excitement about this period of one's life. So, congratulations to you. You called it a handbook. What's the best way for a reader to get the most out of this book in your opinion?
Justin King: I mean, obviously, just flick through it and go, "Okay. Where am I? Am I overwhelmed? Am I drifting along? Am I participating? What would a thriving retirement look like?" Then maybe, answer some of the questions, kind of the life planning questions of, we'd mentioned before, if I was sitting in that rocking chair, and just then work backwards. I'm always thinking about, it's a mental model of backcasting. If you were at the top of the mountain, or looking back down at it, seeing how you got there, that's kind of easier than looking up the mountain trying to work out how to get to the top.
Imagine yourself in that rocking chair just going, "What are all the elements that we want to make a fantastic retirement?" Then dip into the book for the bits that you're thinking, this is the bit that I actually need to consider more. Maybe I've worked a lot at the money aspect, but I haven't really thought deeply about what a truly purposeful retirement would look like, or the health thing I can see that's really important. Maybe I should invest as much time and effort, as I've done with the financial planning into my health to make sure that when I get there, or throughout that period, I'm as well as can be.
Cameron Passmore: Love it. The podcast is called The Retirement Café, and the book is The Retirement Cafe Handbook: Nine Accelerators for a Successful Retirement. Justin, awesome to have you on. Thanks for joining us.
Justin King: Thanks for having me.
Ben Felix: Thanks, Justin.
Cameron Passmore: All right. That was fun. That was a good conversation with Justin.
Ben Felix: Yeah, it was good.
Cameron Passmore: It's kind of fun having the authors come on like that.
Ben Felix: For sure.
Cameron Passmore: Get a chance to have their books get greater exposure too. So anything up lately in your world?
Ben Felix: I've been riding my bike a lot, which is not something that I expected to be doing at this time of year. But it's been clear like it hasn't been snowing here. We had a bit of snow, but it all melted. The grounds actually nice and firm, and might sound ridiculous, but I get nervous about the bears. I saw two bears this summer riding my bike, and they're not scary, they're not intimidating, they don't do anything, but it still makes me nervous.
Cameron Passmore: No kidding.
Ben Felix: They could, that's the thing. Anyway, I was always super nervous about seeing a bear. Both times I saw them, they were cubs. I was like, looking around freaking out. I turned around and went back home because I was scared the mom was going to be hiding around the rock when I turned a corner or something. Anyway, this time of year, no bears. Some really nice bike riding around the trails where I live, so that's been good.
Cameron Passmore: And your basketball injury is healed it looks like.
Ben Felix: On my eye?
Cameron Passmore: Yes.
Ben Felix: Mostly healed. It's a little rough last week. It was looking a little rough. It happens. I've been playing basketball three nights a week.
Cameron Passmore: Really?
Ben Felix: Three days a week, two nights, then on Sundays. I have a league on Sundays, and I play and just pick up runs on Tuesdays and Thursdays. I never would have guessed. I don't know, three years ago that I would even be playing basketball, because I'd hurt my back before the pandemic, and my hips were super sore. I was just like, I'm done playing basketball, and I slowly got back into it a couple years ago, and now I'm feeling great. Bodies are funny.
Cameron Passmore: What percentage would you say your back to, compared to when you're playing in the States?
Ben Felix: Ah, it's a tough question. I'm not training nearly like I was then. Two weeks ago, I had a pretty good dunk in the game. That's something I never would have guessed would happen. I didn't do that very often in college. But it also added a different level of basketball. I don't know, it's hard to answer the question. I'm much smaller than I was. I was like 40 pounds of lean muscle heavier when I was playing.
Cameron Passmore: Wow.
Ben Felix: My former self could probably beat my current self up. I'd like to think I've gotten better at basketball as I've continued to play over time.
Cameron Passmore: But it's still pretty competitive.
Ben Felix: The league I play in is super competitive, and the runs that I go to are also quite competitive.
Cameron Passmore: Awesome. Do you want to take a crack at this first review we got?
Ben Felix: We got Fred Reynaud from Canada, and they said, "Best evidence-based finance podcast. Great range in depth about all things finance. The hosts are based in Canada, but most of the content should be relevant to an international audience. I'm a longtime listener and I've learned so much from the Rational Reminder over the years. You're doing the public a great service by providing digestible information, anchorage, and evidence-based approach. Thank you." Very nice.
Cameron Passmore: We also got a couple of emails to our inbox. "Hi, Ben and Cameron. First, thanks so much for the podcast. So much pop in the media and personal finance is marred by excessive self-promotion gimmicks, or simply bad information. RR is refreshing, and it's rigour in depth, but the show is still accessible and never boring. You spoke repeatedly about landing many of your renowned guests simply because you're willing to ask them and I wouldn't normally reach out like this. But with those comments in mind, why not? I'm trying to make a career change. I've been taking care of relatives the past few years, and I want to get involved in financial services. But the pass in the industry seems less clear for people who don't have the more traditional route, such as a finance degree or an MBA. I'm trying to make a career change. Do you guys have any insights on this or experiences with handling, guiding career changers at PWL? I don't see many resources out there on this topic, and I'm not sure where to look for this info, and what's working or not for people in this kind of position. I'm not sure if the answers just to bite the bullet and take what I can get with one of the industry giants. Or if it's realistic to look for a more fitting role and a smaller local firm. I believe you both had fairly traditional career paths yourselves, so no worries if you're not familiar with this aspect of the industry. This might be a better question for the community forum, but I figured it wouldn't hurt to ask you too. Thanks, and best wishes." They asked me to withhold their name, so I've reached out and I'm going to be talking to them shortly to see what insights I might be able to give.
Ben Felix: I think there may actually be a topic in the Rational Reminder community about something similar. Maybe they can look for that. I laughed while you were reading that, and I want to say why, because out of context, it seems like I was – I don't know. It was an out-of-context laugh. But in the writing, you skip this part. It says, "But the show is still accessible, never boring, [not to personal finance investing nerds at least]. I laughed at that, but you didn't read it.
Cameron Passmore: I shortened the letter a little bit. We got another email, which again, I edited. It's still pretty long. "I wanted to drop you a quick message to say thanks for everything. Seven months ago, I knew strictly nothing about investing. I was completely financially illiterate. It was by chance I stumbled on a video, then I was introduced to Paul Merriman from where we learned about small-cap value. And thanks to Paula, discovered your show, CSI. I enjoyed it so much that after that, I started binge-watching your entire channel. I learned so much from you from the small and value premiums, to the significance of adding emerging markets, the relevance of dividends, glamour stocks, and much more. I just finished watching your video on ESG investing. Videos that particularly stood out for me we're investing for beginners, how to evaluate your investment decisions, investing in happiness, including the RR podcast, investing in your financial literacy, and renting versus buying a home. I've never been so happy to rent after watching that. It's always difficult to build trust about someone on the Internet, especially regarding finance, and investing channels considering there's so many scams and lies out there. Nonetheless, the fact that you systematically backed up your information with peer-reviewed academic papers made it immediately compelling. I really appreciate all the work and effort you put in CSI, and the RR podcast. I discovered Larry Swedroe, he has also taught me so much. Talk with him on Episode 30, as well as the community webinar. Have been great to listen to. Regarding me personally, I've just recently started investing the right way in a low-cost and globally diversified portfolio of index funds. I couldn't be more thankful for your sharing of investment knowledge. As you mentioned, financial literacy appears to be a distinct form of education that contributes to financial outcomes beyond academic education. I look forward to seeing what you're up to next. I become a regular viewer of the show tuning in whenever I can and following every new release. Lastly, below is the link of all the notes I've been taking over the past seven months, since I started educating myself about investing. It contains pretty much everything I know to date, most of it comes from you, Paul, Rob, Larry, and others. Just be warned, it's 45 pages long. It's the result of several months of hard work. In a way a tribute to your teaching. please share with anyone who you believe could also benefit from the information. All the best." I don't know if we're up to sharing that or not Ben, but it was quite a document that they shared.
Ben Felix: For sure we should share it. We have it as a PDF, right?
Cameron Passmore: That was a PDF.
Ben Felix: We can probably get a link at the PWL domain to host that PDF. We can probably combine. There's two, right?
Cameron Passmore: Yep. There's two PDFs.
Ben Felix: Yes. I can probably combine them into whatever, either way. We can create links and post them in the show notes. That's super cool.
Cameron Passmore: A lot of work. It was well done too. Next week, Dr. James Grubman is here. Fantastic episode. Three weeks, Scott Cederburg, which we talked about, he's back. Then in four weeks, it's our year-end episode. Anything else on your mind?
Ben Felix: Good stuff coming up. James Grubman is a good episode.
Cameron Passmore: Those books, Strangers in Paradise, and Wealth 3.0. Fantastic books.
Ben Felix: I knew that was going to be a good episode, because I was familiar with his work. I remember both of us were kind of blown away at how good that conversation was.
Cameron Passmore: Yes. Pretty good interview with Shane last week, and all this coming up is pretty cool.
Ben Felix: Not bad.
Cameron Passmore: That's it.
Ben Felix: That's it for me.
Cameron Passmore: All right. As always, thanks everybody for listening.
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Participate in our Community Discussion about this Episode:
Books From Today’s Episode:
‘Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4590406
Dopamine Nation: Finding Balance in the Age of Indulgence — https://www.annalembke.com/dopamine-nation
The Retirement Café Handbook: Nine Accelerators for a Successful Retirement — https://www.amazon.co.uk/Retirement-Cafe-Handbook-Accelerators-Successful/dp/1739410300
Strangers in Paradise: How Families Adapt to Wealth Across Generations — https://www.amazon.com/Strangers-Paradise-Families-Wealth-Generations/dp/0615894356
Wealth 3.0: The Future of Family Wealth Advising — https://www.amazon.com/Wealth-3-0-Future-Family-Advising/dp/B0C9SHFSGM
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://twitter.com/RationalRemind
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.ca
Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/
Benjamin on X — https://twitter.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/
Cameron on X — https://twitter.com/CameronPassmore
Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/
Episode 30: Larry Swedroe — https://rationalreminder.ca/podcast/tag/Larry+Swedroe
Episode 224: Prof. Scott Cederburg — https://rationalreminder.ca/podcast/224
Episode 169: Prof. John Cochrane — https://rationalreminder.ca/podcast/169
Episode 250: Prof. John Y. Campbell — https://rationalreminder.ca/podcast/250
Episode 278: Juhani Linnainmaa: Financial Advisors, and the Cross Section of Returns — https://rationalreminder.ca/podcast/278
Episode 177: Dr. Anna Lembke — https://rationalreminder.ca/podcast/177
Anna Lembke — https://www.annalembke.com/
Justin King on LinkedIn — https://www.linkedin.com/in/justinking-retirement-planner-ifa/
Justin King on X — https://twitter.com/JustinKingCFP
The Retirement Café — https://www.theretirementcafe.co.uk/
The Retirement Café Podcast — https://www.theretirementcafe.co.uk/podcast