Episode 59: Financial Economics and Annuities: Rational Planning for Retirement

Welcome to another episode of the Rational Reminder Podcast! We have a fantastic guest joining us today to talk about annuities, or in more general terms, pensionization. Alexandra Macqueen is certified financial planner, who is also a financial author, editor, York University educator, consultant, and speaker. Alexandra co-wrote a book with Dr. Moshe Milevsky called Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life, an incredible resource on our topic today. In this episode, Alexandra talks about the important distinction between financial economics and financial planning, the former being much more rational and quantitative than the latter, which is largely based on folklores and rules of thumb. We discuss the concepts of retirement sustainability quotient (RSQ) and financial legacy value (FLV) and the impact they have on each other, before diving into explaining what annuities are and how they are meant to function. She also advises on the use of the GIC ladder, copycat annuities, and considerations for deferring your CPP. Don’t miss out on this insightful conversation!

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Key Points From This Episode:

• The distinction between financial economics and financial planning. [0:02:38.8]
• Product allocation and how it relates to pensionization. [0:04:15.8]
• The retirement sustainability quotient (RSQ) and what it measures. [0:06:46.3]
• How the RSQ affects your financial legacy value (FLV). [0:07:45.7]
• The idea of eliminating the probability of ruin from your portfolio. [0:09:39.6]
• What exactly is an annuity and how does it work? [0:10:15.3]
• The type of person and age group that annuities appeal to. [0:13:53.2]
• Why allocating to an annuity can allow you to spend more on your overall capital. [0:16:20.0]
• The problem with the folklore rules around appropriate withdrawal rates. [0:19:47.8]
• Suggestions for annuities for wealthy people under 50. [0:23:08.3]
• Why a GIC ladder is not a guaranteed stream of income. [0:26:04.9]
• Defining copycat annuities and their accompanying issues. [0:30:57.6]
• CPP and the impact of deferring it at retirement. [0:33:52.4]
• And much more!

Tweetables:

“Financial planning is sort of governed by rules of thumb and almost folklore versus financial economics which is governed by lots of quantitative thinking, equations, lots of rational econs.” — @MoneyGal [0:03:03]

“At the most basic level, an annuity is me handing over my hard-earned cash to the life insurance company that then provides income for as long as I’m alive.” — @MoneyGal [0:11:08]

“The issue with the GIC ladder, and it is absolutely superficially appealing, is that you don’t know when the bear market is coming up.” — @MoneyGal [0:26:19]

Links From Today’s Episode:

Rational Reminder Website — https://rationalreminder.ca/

Alexandra Macqueen — https://www.pensionacuity.com/

York University — https://www.yorku.ca/index.html

Pensionize Your Nest Egg on Amazon — https://www.amazon.com/Pensionize-Your-Nest-Egg-Allocation/dp/0470680997

Moshe A. Milevsky — https://moshemilevsky.com/

Wade Pfau on Twitter — https://twitter.com/WadePfau?ref_src

MoneySense — https://www.moneysense.ca/

Download the transcript of this episode here: Rational Reminder Podcast – EP.59 – Transcript