Learning about accumulating wealth through accumulating income generating assets is easy, I would say. There’s a lot of information out there to help you learn about that. However, information on how best to draw down your portfolio is more scarce. Frederick Vettese wrote Canada’s #1 best selling retirement income book to help Canadians over the age of 65 (and also early retirees) learn how to properly decumulate their portfolio. Here’s my Retirement Income for Life book review.
Who is Frederick Vettese
Frederick Vettese is an actuary. What is an actuary? An actuary is a professional who uses math and statistics to measure financial risk and uncertainty for things like pension plans, investments, and insurance policies. He was the chief actuary for Morneau Sheppell for over 26 years and currently regularly writes for The Globe and Mail and National Post.
For more information on Frederick Vettese’s viewpoints, here’s an interview that Frederick Vettese had on the podcast Rational Reminder:
Retirement Income for Life Book Review
If you are close to retirement (e.g. in the next 5-10 years) or are already retired, this will be a great book for you to read. If you are interested in maximizing your retirement income rather than maximizing the assets you leave behind if you die early, this is also a great book for you to read.
Mr. Vettese attests that a traditional decumulation strategy (e.g. withdraw 4% every year when you start retirement) may lead you to financial ruin- every retirees worst fear, running out of money.
Each year is not going to be the same amount of spending, there may be spending shocks, the top three frequently occurring spending shocks in retirement are:
- Major home repairs
- Major dental expenses (Frankly I was surprised by this but it does make sense. I once met a man who said he had a Mercedes in his mouth from all the money he spent on dental implants)
- Out of pocket medical or prescription expenses
In addition, there are spending shocks like divorce or financial support for a grown up child. The latter one you could control more I think.
On the bright side, spending in retirement doesn’t have to keep up with inflation.
He says that spending in your 70’s decreases by 1% and in your 80’s it decreases by 2%, and stays at 0% for your 90’s.
It makes sense I suppose, in your 70’s you might not be able to travel as much, in your 80’s you definitely likely won’t be traveling, you might not have your license to drive anymore. In your 90’s you will be even more frail and needing home care or long term care or other formal supports hence the increase in spending.
Next, Frederick Vettese talks about the “Enhancements” that you could do to prevent running out of money in your retirement. These are:
- Reducing transaction costs: As a DIY investor I know this well. Why pay for a financial advisor to do diddly squat for you at a rate of at least 1% of your assets under management (1% of a $1,000,000 portfolio is $10,000) when you can track the index yourself with low fees of less than 0.25% MER with an all in one ETF? Take that $7500 you saved yourself and go on an all around the world cruise or a cruise to Antartica.
- Transfer your Risk to Others:
- Defer your CPP pension to 70 if you can: This is easier said than done, no one wants to wait until they are 70 because everyone thinks they will die earlier than age 70. They want their money back from the government now. The CPP pension grows by 8.4% each year after age 65. For example, at age 65 you could be eligible for $12,700 CPP pension but if you wait until age 70, you would be eligible for $18,000 CPP pension annually until you die. This would mean withdrawing from your RRIF assets more heavily before age 70.
- Buy an annuity: An even more interesting or contrarian idea is to buy an annuity so you will have guaranteed income for life. This is “insurance” against poor investment returns and a long life span.
- Determine How Much to Withdraw from your Portfolio:
- You should use a retirement income calculator at least once a year. He suggests using the PERC calculator since it’s free.
- Have a Back Up Plan: HELOC or reverse mortgages might be in the cards if all else fails.
If you are a high net worth couple, reducing your fees and deferring your CPP pension to 70 is still advantageous for you.
What I Liked About Retirement Income For LIfe
Retirement Income for Life was very well written, simple and easy to understand in addition to providing new insights. I liked the summaries at the end of each chapter with the takeaways for your to apply in your retirement planning.
He also shares a free online calculator called PERC (you have to be between the ages of 50 and 80 to use it) it stands for Personal Enhanced Retirement Calculator. You don’t need to enter an identifying data to use it (e.g. no email or name need to be entered).
PERC allows you to figure out how much income to withdraw annually in your retirement from all your sources.
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It’s fun to click around and see what the potential differences in retirement income will be if you add on the enhancements that Frederick Vettese recommended in his book.
What I Didn’t Like About Retirement Income For Life
It was a great book but I would have liked a bit more detail about the statistics for him to come to that conclusion, even if that information is readily available online it would be nice for it to be reinforced in the book. For CPP with be withdrawn at age 70 and deferred, what percentage of Canadians die before age 75? What percentage of Canadians die before 80?
He also said that Long Term Care would only be used for a rare subset of Canadians- I wonder what percentage is that.
If you have severe dementia and no family help or cannot afford to hire private caregivers (which can cost over $80,000 annually in today’s dollars) you will need long term care. Even if you have family help, your caregivers may risk burnout if you’re and not sleeping at night and calling out every hour.
The online calculator reminds me of Cashflow and Portfolios projections. However the Cashflow and Portfolios projections can be used earlier than age 50 which can be nice for people who are planning in advance for the future early retirement.
Hope you enjoyed this Retirement Income for Life book review.
I’d say it is a must read if you are planning for retirement and interesting to remind yourself that rationally, delaying CPP and not taking it early is the best way to go, despite what your lizard reptilian brain says.
You may also be interested in:
- Defined Benefit Pension Plan Canada
- When Can this Single Mom Retire?
- Richer, Wiser, Happier by William Green Book Review
What is your Retirement Income for Life book review?
If you’re close to retirement are you planning on taking CPP early, on time, or delayed?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.
Great review and great book! I like how he points out that your spending will actually go down as you get older in retirement—not up. I see some financial advisors call it your “go go”, “slow go” and “no go” years.
When you re-run your retirement calculation with this in mind you’ll see it makes a huge difference.
@AnotherLoonie- Thanks for reading the review. Yes, I can see it slowing down (like in your 70’s and 80’s) and then ramping up again for long term care or private in-home care in your late 80’s or 90’s.
Hi
Do u have any article about FHSA account? Do u know Wealthsimple offers it yet?
🙂
@Peggy- no not yet but it’s on my list! 🙂 I haven’t heard of Wealthsimple offering it.