Retirement Income For Life
Getting More Without saving More
By Frederick Vettese
216 pp. Milner & Associates, 2018
Vettese turns 65 this month, so this may be the last in a trilogy of books he has written about planning and financing retirement. For 26 years Vettese has been the Chief Actuary at Morneau Shepell, a provider of employee assistance programs. The first book was The Real Retirement , co-authored with Bill Morneau and dealt with the question of how much Canadians really need in retirement, the second, The Essential Retirement Guide, went into greater details about a savings strategy, how long savings need to last and typical spending patterns in retirement. The latest book focuses almost exclusively on decumulation. Together these books provide a great resource to Canadians who see retirement on the horizon and are beginning to wonder whether it is to be embraced or feared.
In his earlier books, Vettese established a clear but conversational style (cue jokes about actuaries), summoned facts where available and offered reasoned opinions when they were not. These strengths continue in this most recent book. The central theme, decumulation, may seem an unfamiliar or uncomfortable word to many readers. Decumulation is the reverse of accumulation; what you saved for retirement is spent in retirement, or de-accumulated. This not as simple as it seems for a couple of reasons:
Both these reasons warrant further examination. The idea that retirees are not good business for investment firms contrasts with the many successful businesses that cater to older people. Servicing retirees may lower margins because of the additional work involved, but they are an expanding market, with those over 55 projected to control 72% of total wealth by 20261. Investors are already voting with their feet and shifting advisors when they approach retirement2. Nonetheless, Nobel Prize winner Bill Sharpe described decumulation as “The nastiest, hardest problem in finance”3. Perhaps the investment industry has chosen easier pickings from savers who can also be sold mortgages, credit lines and insurance?
The behavioural challenges are harder to address, but, at least in part, may reflect retiree’s real concerns about over spending and running out of money. This is where Vettes’ book deserves careful reading. He proposes 5 specific actions:
Most of our readers will be familiar with our enthusiasm for the first point, and this is discussed in more detail here. Vettese encourages retirees to do all they can to have as much of their income in the later years of retirement from predictable sources that continue for the retiree’s lifetime. This is the argument for both deferring CPP and putting a third of the investment capital in annuities. The flip side is that this means income in early retirement relies more heavily on the remaining investment capital in RRSPs, TFSAs and taxable investments. As Vettese acknowledges, this can lead to not just the depletion but exhaustion of investment capital midway through retirement. This could be hard for many to accept as the price to be paid for the reassurance that, no matter how long you live, a base income is always available. Based on how Canadians actually behave, many will read Vettese’s arguments for adding an annuity, agree with his wisdom, and then forget about it.
Dynamic spending is described in the book as the most impactful of all the recommendations. As Vettese states, “The idea behind dynamic spending, is that a voluntary, controlled reduction in spending made early enough might enable you to avert a more drastic and involuntary cut later on. By the same token you can increase spending if you want.”
We have written about the importance of a dynamic spending rule here and here as an essential tool for avoiding both under and over spending. The specifics of Vettese’s approach are obscured by being buried in an online calculator that automatically includes the other enhancements. This makes it a challenge for the user to assess the impact of dynamic spending in the absence of CPP deferral, annuity purchases, and changing spending and mortality assumptions. Nonetheless, the suggestion of re-estimating a safe spending limit periodically (preferably every year) and navigating between a lower safe spend and a higher “best-estimate” spend rate is sound advice that should be more widely practiced. The days of the simple 4% rule, whereby a retiree simply spend 4% of their initial capital every year, indexed to inflation are long gone.
The final suggestion is that retirees who still need additional income exploit their home equity through a reverse mortgage. There is much to dislike about reverse mortgages (fees, and higher interest rates accelerating the equity depreciation, for example), but the contrast with the apparently lower cost of a home equity loan (HELOC) is instructive.
One of the later chapters, “A Message for Employers” may seem out of place for retirees. The core of the chapter is a plea to employers to take some responsibility after the employee leaves the workforce and floats the idea of group LIF’s and group RRIFs that would allow pension providers to retain assets after the employee has retired. Investment advisors who are disinterested in decumulation may find their own book of business decumulating in the face of this new competition.
1 Investor Economics, 2017 Household Balance Sheet Report
2 About 50 per cent of investors will consolidate [near retirement],” says Ingrid Macintosh, Vice President, Wealth, Head of Sales Enablement and Client Portfolio Management, as quoted in www.investmentexecutive.com/brand-knowledge_/td-asset-management/welcome-to-the-drawdown-era/
3 https://www.bloomberg.com/view/articles/2017-06-05/tackling-the-nastiest-hardest-problem-in-finance
