Introduction
“Retirement Income for Life” focusses on retirement planning and asset decumulation strategies. It addresses a critical gap in the existing literature on retirement planning, which tends to focus more on accumulating wealth rather than decumulating it. The central theme of “Retirement Income for Life” is that drawing down one’s savings in retirement is much more complex than it seems, even when following a generally accepted strategy. The book proposes a five-part solution to help retirees generate a reliable income stream and make their savings last longer. While the book makes explicit reference to Canadian personal income tax and retirement programs then key messages likely impact retirement planning in other jurisdictions.
Ratings
Goodreads 4.0-4.1/5.0 (1,000 ratings over three editions)
Amazon 4.2-4.5/5.0 (1,000 ratings over three editions)
Top three themes
Decumulation is complex: The book stresses that drawing a retirement income is not as straightforward as many assume, and even a seemingly sound plan can go wrong. Many retirees either outlive their savings or underspend out of fear of running out of money. The book uses the example of the Thompsons, a couple who followed conventional advice and still ran out of money, to illustrate this point. This highlights how crucial it is to have a well-designed decumulation plan. The book also points out that most retirement advice focuses on accumulating savings rather than decumulating them.
A five-part solution is key: The book proposes a five-part strategy to improve retirement income and make savings last longer. This solution includes reducing investment fees by choosing passively managed exchange-traded funds (ETFs) or using a robo-advisor. It also recommends transferring risk to the government by delaying the start of Canada Pension Plan (CPP) payments until age 70. The plan also suggests transferring risk by purchasing an annuity, which provides a guaranteed lifetime income. Furthermore, the book introduces PERC (Personal Enhanced Retirement Calculator), an online tool that helps determine safe withdrawal rates. Finally, the author proposes using non-financial assets such as a reverse mortgage on a home as a last resort.
Adjust expectations and spending: The book underscores that retirees need to adjust their spending and expectations. It explains that spending tends to decline over time in retirement due to a combination of reduced ability and inclination to spend. Many retirees are so worried about outliving their savings that they tend to underspend, so the book encourages them to be aware of their changing needs and to adapt their spending habits. The book also advises setting aside a reserve to cover unexpected expenses, or spending shocks. Finally, the book explains that a good decumulation strategy should be able to withstand investment losses.
Key quotes
- “Drawing down one’s savings in retirement is something very few retirees do well”
- “Decumulation is not as straightforward as it seems; disaster can strike”
- “The 4-percent rule doesn’t work when investment returns are very poor”
- “Retirees are amazingly resilient in difficult financial circumstances”
- “Spending by retirees tends to rise more slowly than inflation”
- “Reducing investment fees can significantly increase one’s retirement income”
- “Deferring CPP pension to age 70…those same assets last longer”
- “Most bequests are accidental…the amount being inherited is not guaranteed”
- “The decumulation strategies…are widely accepted in the academic community”
- “Robo-advisors may be the most sensible route for most retirees”
Key points
The Decumulation Problem: This section highlights the challenges of drawing down savings in retirement and how even those who appear well-prepared can face financial difficulties. The example of the Thompsons illustrates how a conventional strategy can lead to disaster, particularly when investment returns are poor. The book also introduces the concept of spending shocks, which can impact retirees’ finances.
The Five-Part Solution: This section is the core of the book, outlining the five enhancements that can improve retirement income. The enhancements include reducing fees, deferring CPP, considering annuities, using a retirement income calculator, and making use of home equity. The book argues that by adopting these enhancements, retirees can significantly reduce their risk and increase their financial security.
Investment Risk: This chapter discusses the variability of investment returns and how even a seemingly balanced portfolio can underperform over time. The author uses Monte Carlo simulations to illustrate the range of possible returns and emphasizes the importance of preparing for worst-case scenarios. It also introduces the idea of a 5th percentile return to illustrate the degree of risk.
Spending Shocks: The book explains that spending shocks are a reality for many retirees. While some retirees have sufficient resources to cover these, others need to have a reserve fund to manage these unexpected costs. It also notes that many spending shocks are related to family members, rather than the retiree.
Black Swans: This chapter introduces the concept of “black swan” events, rare and unpredictable events that can have a significant impact on retirement plans. The author uses the 2008 financial crisis and the COVID-19 pandemic as examples, noting how these events can disrupt even the best laid plans. The chapter suggests strategies to mitigate the impact of such events.
Using PERC: The book explains how to use PERC (Personal Enhanced Retirement Calculator), an online tool that helps retirees determine how much income they can safely draw down. PERC takes into account the first three enhancements described in the book. The author stresses the importance of using the tool regularly and adjusting spending as needed. PERC is specifically designed to reflect the impact of the enhancements proposed in the book.
Frederick Vettese is a highly experienced actuary with a career focused on Canada’s retirement income system. His background as the former chief actuary of Morneau Shepell, a large Canadian HR services firm, gives him a deep understanding of the challenges and opportunities of retirement planning. Vettese’s perspective is also influenced by his experience as a writer and speaker on retirement issues. His aim is to translate complex financial concepts into a format that is accessible to a general audience. The author’s background also explains his emphasis on using data and evidence to support his arguments. Vettese approaches the topic with a blend of actuarial rigor and practical common sense, making his recommendations both credible and actionable. He has also authored other books on retirement, demonstrating his commitment to this topic.
Strengths
- Practical and Actionable Advice: The book provides concrete and actionable advice that readers can implement in their own retirement plans. The five-part solution is presented clearly and is supported by real-world examples and data.
- Evidence-Based Approach: Vettese’s recommendations are based on data, research, and actuarial principles rather than relying on conventional wisdom or anecdotal evidence. He cites various studies and reports to support his arguments.
- Challenging Conventional Wisdom: The book challenges popular retirement planning rules of thumb, such as the 4% rule, and presents a more nuanced and realistic view of decumulation. It also challenges the common aversion to annuities and delaying CPP payments.
- Clear and Engaging Writing Style: Despite the complex subject matter, Vettese writes in a clear and engaging style that makes the book accessible to a general audience. He uses relatable examples and avoids technical jargon, making the material easy to understand.
- Focus on Decumulation: The book addresses a significant gap in the existing retirement literature, which often focuses more on accumulating wealth than on decumulating it. By shifting the focus to the critical decumulation phase, the book offers a unique and valuable contribution to the field.
- PERC Tool: The inclusion of the PERC (Personal Enhanced Retirement Calculator) is a significant strength of the book. This online tool allows readers to apply the book’s concepts to their own financial situations and make informed decisions about their retirement income.
Weaknesses
- Limited Focus on High-Net-Worth Individuals: While the book addresses some special situations, such as high-net-worth couples, it is primarily targeted at mainstream retirees. The strategies might not be as applicable to individuals with much larger asset pools or more complex financial arrangements.
- Canadian-Centric: The book is written specifically for a Canadian audience, with references to Canadian laws, tax systems, and retirement programs like CPP and OAS. Readers outside of Canada may find the advice less applicable.
- Complexity of PERC: While PERC is a useful tool, it does require the reader to enter a fair amount of data, which may be cumbersome or challenging for some. However, the book also notes that it is important to complete all the requested information in order to get meaningful results.
- Oversimplification of Spending Patterns: While the book notes that spending typically declines over time in retirement, it may oversimplify individual differences in spending habits. There are also exceptions, such as those with chronic health conditions, or travel enthusiasts, who may have very different spending needs.
- Limited Discussion of Long-Term Care: While the book touches on long-term care, it does not fully address the financial challenges that these issues may present in retirement.
- Potential Bias Towards Actuarial Solutions: The book’s strong emphasis on annuities, which have a low take-up rate, and deferring CPP until 70 could be seen as reflecting the author’s actuarial perspective. While these strategies have merit, some readers may find them less appealing.
Target Audience
The book is primarily targeted at individuals who are close to retirement or who have already retired and are relying on their savings to meet their income needs. This includes people from a variety of backgrounds, such as professionals, executives, middle managers, and other steady workers. The book assumes that readers have some understanding of personal finance, but it is written in a way that is accessible to a general audience. It is not designed for those who are many years away from retirement or who have no savings. While some of the content is a bit technical, it is presented clearly and is easy to understand. The book is also relevant to financial professionals and retirement plan sponsors looking for more innovative decumulation solutions.
Similar Works
Several other books address retirement planning, but few focus specifically on decumulation. Some similar works include:
“The Essential Retirement Guide: A Contrarian’s Perspective” by Frederick Vettese (referenced within the text). This book offers a contrarian view of retirement planning, including a perspective on low interest rates.
“The Number: A Completely Different Way to Think About the Rest of Your Life” by Lee Eisenberg. This book focuses on the psychology of retirement and how to create a meaningful life after leaving the workforce.
“The Bogleheads’ Guide to Retirement Planning” by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf. This book offers a more general approach to retirement planning, with a strong focus on low-cost index investing.
Differentiation
What sets “Retirement Income for Life” apart from other retirement planning books is its unique focus on decumulation and its practical, evidence-based approach. The book also offers a comprehensive, five-part solution that is specifically designed to address the challenges of turning savings into income. Few books on this topic address the complexity of spending shocks, black swan events, or the value of deferring CPP payments. The use of PERC as a practical, actionable tool for readers is also a unique strength. In particular, the book stands out due to its focus on using investment strategies that minimize fees, which can greatly improve retirement income.
Conclusion
“Retirement Income for Life” is an essential guide for anyone approaching retirement or already retired who wants to manage their savings effectively and achieve a secure retirement. By shifting the focus from accumulation to decumulation, Vettese offers a practical and evidence-based approach to retirement income planning. The book is well-written, accessible, and packed with actionable advice, making it a valuable resource for anyone seeking to make their retirement savings last a lifetime. Despite a few minor weaknesses, this book is a standout in the field of retirement planning and should be on the reading list for anyone concerned about their financial future.
Frequently asked questions
Why is decumulation so much harder than saving for retirement?
The book explains that while accumulating savings is fairly straightforward, decumulation involves navigating uncertainties like investment risk, longevity, and spending shocks. Most retirement advice focuses on the accumulation phase, leaving retirees unprepared for the complexities of drawing down their assets. Additionally, retirees often struggle with the psychological aspect of seeing their savings diminish, leading to anxiety and either overspending or underspending. Unlike the accumulation phase, where the focus is on growth, the decumulation phase requires balancing income needs with preserving capital.
How can I ensure my savings last if I don’t want to buy an annuity?
While the book advocates for annuities as a way to transfer longevity risk, it also presents alternative strategies. The first step is to reduce investment fees by using passively managed ETFs or robo-advisors. Secondly, the book suggests deferring CPP to age 70 to create a larger guaranteed income stream later in life. It also advises using PERC, an online retirement income calculator, to determine how much income you can safely draw down annually. Finally, it explains that having a reserve to manage spending shocks is also important to keep your plan on track.
What if I want to leave a substantial inheritance to my children?
The book distinguishes between “accidental” bequests and intentional ones. Most people leave an accidental bequest, which is simply whatever is left over upon their death. The book also explains that prioritizing an inheritance can limit your investment options and reduce your retirement income. It suggests that for those who plan to leave an inheritance, they should estimate the value of their home and other assets to determine the minimum amount that will be available upon death, and then factor this into their retirement planning, potentially holding back some assets when entering information into PERC. However, it notes that children’s need for financial assistance tends to decline as they age, and that your ability to leave a bequest may also diminish over time.
About the author
Frederick Vettese is a Canadian actuary and former Chief Actuary of Morneau Shepell, a large Canadian firm providing actuarial services. He has written over 100 articles for the national newspapers plus three books on Canadian retirement issues. The most recent book, “Retirement Income for Life” is targeted at savers who are nearing retirement and who want to turn their life savings into sustainable retirement income. Frederick grew up in Toronto where he continues to live with his wife Michelle. He graduated from the University of Toronto with an honours Bachelor of Science before studying to become an actuary.