Your Retirement Income Blueprint

Retirement advisor Daryl Diamond says that many financial advisors can help people accumulate wealth during their working years, but when it comes to planning how to create income during retirement, “advisors who are proficient in this area are not all that easy to find.” His book Your Retirement Income Blueprint lays out his “six-step plan to design and build a secure retirement.”

I found this book very helpful in discussing the important issues to consider when creating retirement income. I believe it will help me to better plan my own retirement. However, there were a number of specific areas where I disagree with Diamond. I have already written about the biggest of these, that he advocates withdrawal rates that are too high; I won’t say more about this issue here.

For me, the best part of this book is the discussion of RRSP withdrawal strategies. Common tax advice is to defer taxes as long as possible, which means draining non-registered savings and TFSAs until you’re forced at age 71 to draw from RRSPs and RRIFs. However, my own simulations show that it can make sense to draw from RRSPs early.

Diamond says “the prolonged deferral of RRSP and other registered money can possibly lead you to a tax trap.” Large RRIF withdrawals can push you into higher tax brackets and even lead to OAS clawbacks. He advocates the idea of “topping up to bracket,” which means drawing RRSP or RRIF income up to the top of your current tax bracket starting after you retire but well before you turn 71.

A common rule of thumb is that you will need 70% of your pre-retirement income during retirement. This rule of thumb has many critics. Diamond’s position is more subtle. He says that while this rule of thumb “may have some application during the accumulation years, it is far better for you to be more specific about your own situation as you approach retirement.” However, he warns that “about half of those who are newly retired find that they end up spending more than they expected in their first two years of retirement.”

On fees, Diamond finds that “too many investors who choose to use an advisor are paying fees but getting little to nothing in exchange.” However, he softens his stance claiming that there are many “mutual funds providing higher, after-fee returns than comparable investments with lower fees.” All academic evidence says that funds with high past returns don’t tend to keep up the high performance. Mutual fund performance chasing of the type Diamond is promoting is a losing game for most investors.

Diamond makes the case that most (but not all) people should take CPP early if they have retired early. His reasons include giving your assets more time to grow, but the implied rate of return from delaying CPP is higher than investors can expect to get from their portfolios.  I used to be concerned about the cap on the size of the CPP survivor’s benefit, but it turns out that the cap calculation is complex and doesn't penalize those who start CPP late.  I now feel strongly that most people who have enough savings should delay taking CPP.

Unfortunately, in a discussion of annuities, the examples don’t include any indexing to make payments grow over tome. This gives an unrealistic view of annuity payouts. A payment that looks good when you’re 60 won’t look as good at 65 after 5 years of inflation. It will look much worse after a couple of decades of inflation.

A detail about RRSPs and RRIFs that I didn’t know is that if you are still under 71 and have turned your RRSP into a RRIF, “you have the option, should you wish to stop the income from your RRIF, to change it back to an RRSP.”

Diamond’s discussion of TFSAs is somewhat misleading on two points. He says TSFAs have “very flexible ‘in-out’ provisions—any withdrawals restore contribution room.” Those who know about TFSA penalties know that the room isn’t restored until the next calendar year. Freely popping money in and out is a formula for getting a letter from CRA demanding penalties.

“Contributions may be made to a spouse’s TFSA without attribution to the contributor.” This is true. However, if the money is pulled back out of the TFSA and invested in non-registered accounts, the new gains are attributed back to the original TSFA contributor.

“What people pay in management fees on their investments ... is often a minor issue compared to what they needlessly pay in taxes.” This just isn’t true. Both are important issues. However, paying an extra 1% per year in management fees can reduce retirement income by 25% or more. Even an egregious tax error such as failing to split a $60,000 income across both spouses reduces income by about 13%. Clearly, both management fees and taxes matter a great deal.

Diamond explains the problems with variable annuities and Guaranteed Minimum Withdrawal Benefit (GMWB) contracts, but goes too easy on them. A guaranteed minimum payout of 4% may sound reasonable, but it isn’t indexed. He does explain that the very high fees on your capital make it unlikely that payments will increase much, but then says “that does not mean that variable annuities aren’t good.” I’ve never seen a good one. They seem perfectly designed to hide huge fees and exploit people’s lack of understanding of the devastating effects of inflation over decades.

Diamond is positive about monthly income funds because “the capital value of the investments will fluctuate with markets but the number of units or shares remains unchanged.” This sense of not dipping into capital is often just an illusion. Many of these income funds not only don’t increase payments with inflation, but they have had to cut payments. Your account statement makes it look like your capital is intact, but the fund itself has been dipping into your capital to pay you each month.

Diamond believes people often need critical illness insurance and long-term care insurance throughout retirement. He says the “odds are nearly 50%” that you’ll need some form of long-term care. Doesn’t that mean the insurance company will have to charge a hefty premium? By the time you factor in the insurance company’s overhead and profit margin, the premium would have to cost about as much as the care itself. Diamond would have to provide some numbers for this to make any sense to me.

Despite my numerous criticisms of parts of this book, I’m quite happy I read it. I have found it challenging to decide on the best way to handle a portfolio through retirement, and Diamond has provided a good framework for working through the various issues. I recommend this book to those who will have to live in retirement on their own savings.