I was going to put on my advertising copywriter hat and create a deliciously funny or interesting or witty headline, but sometimes the simple truth can do the talking. The title of Frederick Vettese’s retirement handbook says it all.
And who doesn’t want to get more with less? And that is the general theme of this must-read book for Canadians who are in retirement or who are preparing for retirement. The book cover offers a visual metaphor that reinforces the theme of retirement strategies – everything is stacked, layer upon layer. Retirement funding works in layers but with many moving parts.
And for most Canadians retirement funding will be quite the challenge to figure out and to execute effectively without a plan. Many Canadians will need help, they will need to consult an investment professional to obtain the blueprint for a successful retirement. Mr. Vettese states that most Canadians are doing it wrong and are short-changing their retirement. Too many are either running out of monies, or they are not spending enough of their retirement income. Retirement Income For Life can help Canadians get it right.
Mr. Vettese knows the path; he has been the Chief Actuary at Morneau Shepell for almost 30 years. Morneau Shepell is the largest administrator of retirement and benefit plans in Canada. And yes if the name Morneau sounds familiar that might be because the company is owned by our Finance Minister, Bill Morneau.
The good news from the book is in the sub-title: Getting More Without Saving More.
The book blows up many of the retirement myths with respect to how much Canadians actually spend in retirement and when and how they need to spend those monies. It’s truly surprising how our spending needs typically decline as we approach retirement, and in retirement as costs slip away. In retirement we should not have a mortgage, we are no longer saving for retirement, we are not saving for our kids’ education, we are likely not supporting our kids, our income taxes are lower, we are not paying into EI or into the CPP Canadian Pension Plan. There are no work-related costs. Transportation costs can decline tremendously.
The financial industry will often suggest that retirees should replace 70% of their income from their working years. That is, if a couple earned $100,000 annual in their working years, they should aim for $70,000 of annual income in retirement. But a recent study showed that middle-income Canadians who replaced 65-70% of their income ended up with a much higher standard of living in retirement. Incredibly 4 out of 5 increased their standard of living by 20% or more. In some cases the amount that they had available to spend doubled.
Your final years of work will give you a good indication of how your regular fixed spending needs have declined. Keep track. This will help you determine your spending needs in retirement. In the book, the fictional couple of Carl and Hanna discovered that from age 55 they were only spending 36% of their combined gross income. The message or lesson here is also that the final years of work can provide a wonderful opportunity to play retirement portfolio catch up. You might be able to make up for any lost time and add aggressively to your RRSP and TFSA accounts.
Carl and Hanna are the (tragic) stars of Retirement Income for Life. Mr. Vettese takes us through their retirement years. Unfortunately they follow the accepted conventions of retirement funding and they run out of money.
They still have CPP and Old Age Security payments but their $550,000 investment portfolio is gone in quick order. The problem is they spend at a fixed rate and increase that spending annually to compensate for inflation. They spend based on conventional retirement spending models and not on how most retirees actually need to spend. Retirees spending needs will typically be higher from 65 to 70, and then the spending needs start to decline at a surprising rate.
Carl and Hanna also got hit with some unexpected costs. They chose to help out their adult son who ran into financial difficulty. They also collided with a period of poor returns for their investment portfolio. Their retirement plan was very rigid. What they needed was a plan that was very elastic and flexible. The retirement square peg did not fill well into that round hole.
Retirement Income For Life then takes us through the 5 Enhancements that would have allowed Carl and Hanna to enjoy stable retirement funding, with their portfolio also going the distance. You might be surprised by these Enhancements.
Enhancement 1 – Lower Fees
As you can imagine, this is one of my favourites and this one came as no surprise. Carl and Hanna were too busy funding the retirement of their mutual fund company employees and their advisor.
Don’t pay high fees. They are a wealth destroyer as Larry Bates reminds us in Beat The Bank. They are also a retirement killer. Imagine trying to spend 4% of your portfolio value each year and you’re handing over 2.5% annually in fees. Others are benefitting more than you.
Move to a Balanced ETF Model Portfolio, find some lower fee funds (there are a few) or have a chat with a lower fee ‘Robo Advisor’. Here’s my post What And Who Are The Canadian Robo Advisors? Don’t let that Robo word scare you, these firms are all quite human and you can get advice and talk to real humans whenever you need assistance. While you might pay fees of 2.2%-2.5% with typical mutual funds at your big bank, you can invest with a Robo, all in, with fees in the area of .20% – 60%. With Canada’s lowest fee provider Carl and Hanna would have fees beginning at .21%.
Off the top they could have saved more than $10,000 annually. Who doesn’t want a $10,000 annual retirement raise?
Enhancement No 2 – Delay Taking Your CPP
This one is so easy and an incredible benefit for most Canadians according to Mr. Vetesse; but only 1% of Canadians delay their CPP for the advantage of higher CPP payments. The idea here is that instead of taking CPP at 65 (you can actually start at 60 with greatly reduced payments) you wait until age 70 and you might see payments that increase by some 50%. If Carl had taken his CPP at 65 he would have received $12,700, if he had waited until 70 he would have received $18,950.
Of course with this strategy the retirees will draw down their own investment portfolio in a more aggressive fashion. That’s a good trade-off for most. You will greatly remove your riskier assets (your stock and bond portfolio) and replace it with the ‘guaranteed’ inflation-adjusted income of CPP and OAS.
It appears that advisors are not offering or suggesting this enhancement. Mr. Vettese (and me included) wonders if that’s due to the fact that advisors do not want their clients to more quickly decrease the funds that pay fees to the advisor? We know that the investment community too often ‘takes care of itself’ before clients. I know it to be true. Canadians have told me the truth, over and over and over again.
And yes, many Canadians will choose to take CPP early or on time. They want to preserve their own hard-earned portfolio, even when the math says start to spend it down. Follow the math, not your emotions.
Enhancement No. 3 – Buy An Annuity.
Yes, this one will be even more controversial. As you may know, with an Annuity you fork over a sum and in return you receive guaranteed income. You remove more of the investment risk, you replace that risk with regular income. Mr. Vettese suggests that retirees (couples) even with $200,000 or more of investable assets should consider this option. The advice is that about 30% of your portfolio will go to an Annuity. This more predictable and lower risk investment increases the odds of retirement income success.
Once again, this is obviously not put forth with regularity by advisors. Why? Perhaps they don’t like the one-time payment. Only 5% of Canadians add an annuity to their retirement mix.
For more on annuities have a read of Pensionize Your Nest Egg, from Alexandra C. Macqueen.
Change that investment mix to a more aggressive stance.
Because you’ve moved that 30% to an Annuity, you will then need a more aggressive investment portfolio. Remember it is the stocks in your portfolio that deliver the greatest inflation protection and growth over longer periods. For the remaining investments you might move to a Balanced Growth model, meaning about 70% stocks with 30% in bonds.
Enhancement No 4 – Dynamic Spending Approach.
Carl and Hanna kept spending at a regular inflation-adjusted rate even though they had a big surprise spending need (their son) and then they were met with a period of poor investment returns. They needed to reduce their spending needs to a base level. The book will show you the retirement spending bands. Carl and Hanna should have known their absolute minimum base spending needs for covering all costs and living well, but perhaps many of the extras and travel would need to have been curtailed for a period.
At times your investment portfolio will tell you how much you have to spend.
Enhancement 5 – The Nuclear Option
Now keep in mind, by following Enhancements 1-4, Carl and Hanna were sitting pretty in retirement. But if they were to meet another unexpected crisis, they might move to the nuclear option. And that is they downsize their home or they can access a Home Equity Line of Credit (HELOC). They can tap the value in their home. They might also go the route of a more expensive Reverse Mortgage.
Of course the kids might not like the draw down of their inheritance, but it might add many more years of a happy retirement for Mom and Dad.
While there is no retirement crisis in Canada, it appears that Canadians are simply not ‘doing it right’. And there is not a great understanding of the retirement funding principles – by retirees and advisors.
Mr. Vettese suggests that you simply take this book, place it down in front of your advisor (I’d suggest fee-for-service) and say “Give me this”. Run the numbers.
This book was more than an eye-opener for me. As a self-directed investor I will likely not go the route of an annuity, but it is now on the table. When the time comes to entire my full retirement stage I will have a fee-for-service advisor run all of the scenarios.
I’d suggest that any Canadian with an investment portfolio do the same. I’d suggest you read Retirement Income For Life. I’d suggest advisors have a read and explain these options to your client.
As always, put your client first.
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Thanks for reading,