I read a lot and I write a lot but, weirdly, I’ve never written about a book that I’ve read. So, today I thought I’d try something new and tell you about a finance book that I recently finished. This is one that had been recommended to me by several readers of this blog, in fact: Retirement Income For Life by Frederick Vettese.
Why you might need this book
Most financial books are about how to accumulate money. This one is about how to “decumulate” your money in retirement – essential knowledge for those who plan to draw on their investment accounts to fund their lifestyle – i.e. most of us.
Decumulation strategies are the bread and butter of financial planners, but a black box for most self-directed investors. For those who want to figure this out on their own, Retirement Income For Life demystifies the process and provides a clear framework that minimizes risk and maximizes sustainable income.
Vettese was the Chief Actuary for Morneau Shepell, so he knows his way around spreadsheets and calculators, but in this book, he also shows that he understands how to communicate important financial concepts to us mere mortals.
“By the Book” retirement planning can fail
In Part One of “Retirement Income for Life”, Vettese introduces us to a pretty typical couple, the Thompsons, who are on the cusp of retirement. Unfortunately, doing things “by the book” will put them at risk of running out of money. Among other things, the author describes how “the 4% rule” is simply too rigid and carries unacceptable risk if investment returns are persistently low or there is a financial shock early in their retirement.
On the other hand, Vettese outlines the data showing that: “Spending by retirees tends to rise more slowly than inflation, especially between ages 70 and 90.” So, even though retirees must be careful with their assets, on average, they tend to draw those assets down more slowly than you might think (something I wrote about recently HERE).
A reasonably cautious approach
Throughout the book, Vettese takes a cautious approach, warning against investments like second mortgages and real estate (unless you have expertise in that area). Retirees are generally a risk-averse bunch, so it makes sense to be conservative. Don’t shoot for the moon, rather aim for a 5% rate of return. But longevity risk – the risk of running out of money – is the biggest risk of all. In Chapter 7 Vettese concludes, “Your best bet for a 5 percent annual return is to invest in equity funds, risky as they are.” I agree.
For the remainder of the book, he assumes the Thompsons will use funds to accomplish a 60-40 asset allocation. This is reasonable because it strikes a good balance between buffering volatility and capturing the superior returns of equities. Obviously, my opinion is that more seasoned investors might choose to buy individual stocks for a portion of their portfolios, but that’s beyond the scope of this book and may not be appropriate for the average reader.
At this point, the table has been set for the Thompsons and Vettese walks them through a series of “Enhancements” that will drastically improve their situation and provide secure “retirement income for life”.
Enhancement #1: Reduce Investment Fees
Vettese rightly points out that this one is a no-brainer. He doesn’t beat around the bush:
“Actively managed funds are more expensive than passively managed funds, like ETFs, but with no evidence that they add value when you take fees into account.” As far as I’m concerned, he could drop the mic at this point, but he goes on to prove this point by citing the same SPIVA data that I frequently refer to.
Vettese has the Thompsons invest passively rather than actively using a robo-advisor which brings their annual fees down from 1.8% to 0.6% per year. But he admits that one could quite easily cut this to about 0.15% using a simple basket of ETFs (akin to the Canadian Couch Potato (CCP)).
Personally, for those who prefer ETFs over buying and holding individual stocks, I think robo-advisors and CCP portfolios are being squeezed out by all-in-one asset-allocation ETFs which provide almost all the benefits of a robo-advisor at about one-third the cost.
Reducing fees might be the biggest factor that is within our control as investors. It improves our financial situation significantly without the need to take on more risk. Enhancement #1 gets a big thumbs-up from me.
Enhancement #2: Delay CPP
Income security matters just as much, if not more, than income level in retirement. Is there a way to get both?
For those who have assets in accounts like RRSPs, delaying CPP can be a game-changer – not just because CPP payments increase by 8.4% per year, but because those payments are guaranteed for life and are fully indexed to inflation.
Vettese gives a good summary of how CPP payments are calculated (with more detailed information in an Appendix), then clearly illustrates how this will benefit the Thompsons in two different ways: not only do they “. . . meet their income target for another two years but, more importantly, their income gap in the remaining years is much smaller than it was before . . .”.
Even though waiting a few years for much larger CPP payments is so clearly beneficial, many people are reluctant to delay CPP – something that became clear to me when I wrote about this last year. Vettese dedicates an additional chapter to acknowledging and addressing these concerns while clearly outlining the few situations in which delaying CPP may not be a good option.
Enhancement #3: Buy an Annuity
Lowering fees and delaying CPP are slam-dunks for many retirees; buying an annuity is a tougher sell. Vettese acknowledges this, but lays out the case clearly and rationally so that by the end of the chapter I was convinced – not that every retiree should buy an annuity, but that every retiree should, at least, consider it, particularly if they are highly risk averse.
The rationale is straightforward: transfer as much risk as possible outside of the retiree’s portfolio. Delaying CPP transfers longevity risk to the government. Buying an annuity transfers even more longevity risk to an insurance company. On page 165 Vettese reminds us that, “. . . the primary purpose of a decumulation strategy is to reach your income target no matter what happens.” This is a challenging but important shift in mindset that is essential for effective retirement planning.
Vettese recommends using about 20% of your tax-sheltered assets for the purchase of a “joint and survivor” annuity (if you’re married) at retirement. Interest rates are much higher now than they were when the book was written, making Enhancement #3 even more compelling. If you’re interested in checking out annuity rates, try HERE (no affiliation). Looks to me like annuity income is about 20% higher than it was two years ago.
Enhancement #4: Know how much income to draw
“As important as the first three enhancements are, they are practically useless if you draw too much or too little income.” Even a small change in spending compounded over many years of retirement will have a massive impact on your financial security. So, the two big questions are:
- How do you know how much income to draw from your savings, and
- How do you modify that amount based on your situation improving or worsening over time?
I was really impressed with this section of the book because retirees wrestle with these questions all the time. Using an approach that is both flexible and sustainable is key.
The default for many self-directed investors is to live off the sum of their CPP/OAS, mandatory RRIF withdrawals, dividend income, and any company pension income they might be entitled to. But we can do better than this, and Vettese shows that you don’t even need a financial planner if you’re willing to do a little work yourself.
Enhancement #4 involves using the “Personal Enhanced Retirement Calculator” (PERC) which Vettese created himself. If you are at least 50 years old (it won’t work if you enter an age younger than that), I would encourage you to try it out HERE. It takes a few minutes to enter all the relevant information, but this is one of the best free online calculators I’ve ever seen. It will show you how much income you can draw based on 3 different scenarios:
“Scenario 1 – your investment returns are very poor and you do not adopt the 3 main enhancements described in the book, “Retirement Income for Life”
Scenario 2 – your investment returns are very poor but you do adopt the 3 main enhancements
Scenario 3 – your investment returns are average (around 5%/yr) and you adopt the enhancements”
It’s not as good as the professional planning software that I use with my clients (for example, PERC assumes a 60/40 portfolio and income tax calculations are approximate), but for a free calculator, it’s really very impressive.
Update: I reached out to Mr. Vettese and he informed me that there is a new version of of the PERC Calculator HERE. It frames the results a little differently, but is largely the same as the older version.
Enhancement #5: The Reverse-Mortgage Backstop
The first four enhancements aim to make the most of your retirement savings, but what if your retirement road is particularly rocky and you need to somehow generate additional income late in life? If you own your home, Vettese says you have options.
He is quick to point out that, “. . . borrowing against your home is not something you should do lightly.” But it is something some retirees might consider if they have ample equity in their home and downsizing is not an option.
Vettese explains that reverse mortgages carry higher interest rates than regular mortgages, but you don’t have to make any payments while you or your spouse are living in the home. Nor can you be forced to move out. Thus, the higher interest rates reflect the additional risk taken on by the lender.
Vettese is clear that a reverse mortgage is a last resort and should likely only be considered around age 75. Thus it’s more of a back-stop than an enhancement.
Bottom Line
Retirement Income For Life is essential reading for any self-directed investor who is either planning for retirement within the next five years or already in it. The book is clear, evidence-based, and well-written. You may not choose to use all the enhancements, but you will understand those choices and have the tools to reassess your decisions as time goes on.
If you combine the tools in this book with the Retirement Bucket approach I described in my last post, you’ll be on track for a very secure retirement.
What are your thoughts about Vettese’s “Enhancements”?
Was this summary and review helpful for you? Would you like to see more posts like this?
If you’d like to buy the book, you can find the most recent edition on Amazon.ca here:
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Great article Matt, thanks. I have used the PERC calculator a number of times in the past. I had no idea there was an updated version. Thanks for the link.
I understand Mr Vetesse is updating this book. Any idea on a timeline? I have read all his decumulation related books and look forward to the next.
Thanks
Chuck
Thanks for the comment, Chuck. Yes, PERC is a great resource. The old version worked well for me, but the new one stalled at the final step. I have emailed Fred and his IT team is working on it.
Re: an update on the book – I don’t know but have asked and will let you know when I hear.
Just heard from Fred – new edition is due out in October!
I enjoyed reading this book and agreed with most of the concepts although did not feel that much of it applied to our situation. My wife and I have/will have good DB pensions that will have 60% survivor benefits to one of us. I have yet to see a calculator that describes this senario (i.e. the calculators show a complete end to the DB pension with death of a spouse). We feel that between government benefits, DB Pensions and dividend income from a 7 figure investment portfolio we can live a very comfortable retirement….and of course being debt free, including mortgage.
My only reget is that we did not move to self-directed investing 10-20 years sooner.
“My only regret is that we did not move to self-directed investing 10-20 years sooner”
When I am mentoring people who are considering becoming self-directed investors, they are almost always afraid of making a mistake that they will regret. What I always tell them is that the biggest regret of self-directed investors is almost always the same: that they didn’t start doing it sooner. Sure, there are always hiccups along the way, but they are dwarfed by the advantages.
This book was a game-changer for me. I revamped my decumulation strategy after reading it. I was going to take CPP at 60. Now I’m waiting to 70 (if I can).
I did find that, after making such a compelling argument for deferring CPP, Mr. Vettesse kinda wimped out on making a similar argument for deferring OAS. It is true that the reward is slightly less, but the other benefits still hold water.
I plan to defer both CPP and OAS as long as possible, tapping OAS first if I need the income.
Great comment, Neil. Sure, OAS only increases by 7.2% per year that it is delayed vs. 8.4% for CPP, but it is still fully adjusted for inflation and it’s so valuable to have more guaranteed income in retirement. I wonder if Vettese felt that delaying CPP was already such a tectonic shift in thinking that bringing OAS into it too might alienate people. Given that only ~10% delay CPP, there might be some merit to that.
When I work with my clients, I always look at both separately because delaying OAS is not always as clear-cut as CPP, particularly with the claw-back.
“When I work with my clients, I always look at both separately because delaying OAS is not always as clear-cut as CPP, particularly with the claw-back.”
One of the reasons I am thinking of delaying collecting OAS is because of the claw-back. My income projections indicate my spouse and I will likely be a ways (maybe 20-35%) into claw-back territory when we retire next year. My thinking is, delaying collecting OAS will result in no claw-back for the delayed years, a higher claw-back range once we start collecting and thus a higher percentage of lifetime OAS paid.
An update to my March 26 comment: I ran the numbers and turns out the best strategy for us is to start OAS at 65 and collect as much of it as we can before the income from delaying CPP until 70 kicks our total income much higher and we’ll be well into OAS clawback territory. Albeit, not a bad problem to have.
Like all financial planning books there are always some good take-aways from most books, I have read two of Mr Vettese’s books along with Daryl Diamond ‘s and a few of Henry Mah’s books. I understand Fred’s love of Annuities , but not for me. Self directed investing allows one to pick the salient points that make sense for our situation. The website Cahflows & Portfolios has a wonderful cash flow planning spreadsheet That can be customized to ones own situation. I wish someone would develop retirement financial planning software for the individual user. Most free ones are pretty lame or general. which leaves the self directed investor / retiree to develop their own.