Tuesday, October 30, 2018

Retirement Income for Life

If you don’t have a defined-benefit pension, odds are you’re losing some sleep worrying about saving enough money during your working years to retire well. You might even have a retirement savings goal in mind. With all this to worry about, you probably don’t think much about how to spend that money during your retirement. Probably something like the 4% rule will be good enough, right? Well, the 4% rule is better than no plan at all, but you can do a lot better.

Frederick Vettese explains solid strategies for the “decumulation” phase of your life in his excellent book, Retirement Income for Life: Getting More Without Saving More. He starts off showing how the 4% rule can fail, and then makes a sequence of 5 enhancements that improve the decumulation strategy significantly.

The five enhancements
  1. Reducing investment fees
  2. Deferring your CPP pension to age 70
  3. Buying an annuity with about 30% of your savings
  4. Being prepared to adjust your annual spending if markets boom or crash
  5. Taking out a reverse mortgage late in life if necessary

Many people will object to some of these enhancements. There is a very good chance that whatever objections you have, Vettese discussed them in the book and explained convincingly that you’re not right. It’s no fun to be proven wrong, but the upside is getting more income out of your retirement savings.

Enhancement 1: The benefits of reducing investment fees are obvious, except for those who don’t even realize they are paying huge fees on their mutual funds.

Enhancement 2: “Only 1 percent or so of all CPP recipients postpone the start of their CPP payments until age 70,” even though doing so can be so advantageous. And Vettese jokes that he’s not sure “if they started their CPP pension late by design or accident.”

Getting people to defer their CPP payments is a tough sell, as I’ve discussed before. If you think that wanting to spend money in your 60s while you’re still young enough to enjoy it is a winning argument, I’m sorry to say that this idea doesn’t hold water for people with at least $100,000 in savings (double that for a couple). The truth is that planning to delay CPP makes it possible to spend more in your 60s safely.

The arguments for delaying CPP to age 70 apply nearly as well to delaying OAS payments to age 70. However, Vettese worries that getting people to delay CPP is a hard enough sell without asking them to delay OAS too.

Enhancement 3: Annuities are another tough sell, but the proof that they help when markets give poor returns is in Vettese’s well-explained simulations. My trouble with annuities is that the market for them seems so opaque. There is limited information available to compare payouts of standard annuity types. I’m interested in annuities whose payouts rise by 1% or 2% each year, and I’ve never found a way to get payout information online. I’ve seen elderly members of my extended family negotiate GIC rates with their banks, and still end up with rates more than 1% below what was available elsewhere. I’m afraid that will be me with annuities because I don’t know how to find the best payouts.

At one point, the author admits to being surprised when his simulations showed that delaying CPP and buying an annuity weren’t “a net drag on retirement income when investment results are good.” I’m not surprised because both enhancements shift longevity risk away from the retiree to either the government or an insurance company. The book’s simulations assume a long life where you win at life but lose at longevity risk.

Enhancement 4: The benefit of being prepared to adjust your spending is that you don’t have to leave such a huge margin of safety. “The idea behind dynamic spending is that a voluntary, controlled reduction in spending made early enough might enable you to avert a more drastic and involuntary cut later on.”

Enhancement 5: Vettese calls reverse mortgages “the nuclear option.” They’re not a core part of his plan. But if markets perform badly for many years, and you’re safety margin wasn’t enough, starting a reverse mortgage late in life can make sense.

With a reverse mortgage “You cannot be forced to move out. You do have to maintain the house, however.” These statements seem to contradict each other. If you don’t maintain the house well enough, can you be forced out? From experience, I can tell you that old people often stop maintaining a house properly once they have physical or mental problems or run short of money.

Your spending pattern

“The traditional advice for middle- and high-income earners is to shoot for a retirement income target of 70 percent of final average earnings.” The book goes through the numbers to show that this is too high for most people. In retirement, your income taxes go down, you don’t need to save any more, you probably finished off the mortgage, and your kids probably cost less. Few people need 70% of their former income to end up with the same standard of living.

Academic studies consistently show that our inflation-adjusted spending declines, on average, through retirement. Based on this finding Vettese’s simulations assume that your inflation-adjusted spending will be flat in your 60s, decline 1% each year in your 70s, decline 2% each year in your 80s, and remain flat thereafter.

It makes intuitive sense that you slow down and spend less as you get older, and academic studies support this idea. However, as I’ve argued before, I see problems with planning for your retirement spending to decline this much as you age.

My main objection is that some people start to spend less because they overspent early in retirement, and now they have no choice. I’m not saying this applies to everyone, but it does apply to a nontrivial number of people. Few people will admit to this easily, though. I had a long discussion with my neighbour about how he works part-time in retirement. It began with talk of needing something to do, but he eventually got around to admitting indirectly that he needed the money.

Vettese’s model of declining spending has your spending dropping by 26% from age 70 to 90. This is a big drop. Things like property taxes, house insurance, and house repairs won’t decline that much, so everything else has to drop by even more. I can believe that people do spend this much less, on average, but for some the decline is forced rather than a choice.

The book argues that “couples aged 75 and over either saved or gave away as cash gifts an average of 16.1 percent of their income. Couples 85 and older saved or gave away even more. Saving so much ... showed that the drop in spending had little to do with insufficient income.” This shows the problem with trying to reason with average figures. The saving and giving away of 16.1% of income is a mix of people giving away more than this, some giving away less, and some giving away none. You can’t then conclude that nobody is short of income. This just isn’t true.

A UK study reported that “most of the 80-year-old respondents said that their spending was not constrained by a lack of money.” Most is not all. The existence of people whose spending declines due to lack of money skews the study’s results.

Ideally, we’d like to base our retirement spending plans on the experiences of people who make the choices they want rather than those who are forced to spend less due to running out of money. It would be nice to go back to the academic studies and ask the researchers to remove data from people whose spending was forced to decline. Then we could see what happens when people do what they naturally want to do. If we could do this, there might still be a spending decline with age, but I’m guessing that the decline would be less than what Vettese uses in his simulations.

All that said, though, I still find the book’s 5 enhancements very interesting. I suspect that using lower spending decline percentages would make some difference, but that the enhancements still make sense.

Some good quotes

“You have to invest in stocks if you want a decent return over the long run.”

“I don’t see any good reason to adopt a stock weighting as low as 50 percent in your RRIF or RRSP, apart from wanting to avoid a lecture from your financial planner.”

“I used to do market research on my own and trade individual stocks. It was hubris to think I was smarter than the crowd.”

A salesman trying to choose the right size of fridge in a sitcom asks “How many cubic feet of food does your family consume in a week?” In figuring out whether you’ve saved enough, Vettese doesn’t want to make the same mistake and says “I’m not going to ask you how many cubic feet of money you will consume in retirement.”

Using DSCs “is one of the most odious practices a fund salesperson can perpetuate on an innocent investor.” “The salesperson might say it is for your own protection—so you don’t jump from one investment to another too often—but this is like a third-world employer saying that he locks in his migrant employees at night ‘for their own protection.’”

Online Calculator

The author generously makes a retirement income calculator available free online. This calculator never asks for your name or email address, and you get a pdf file of your results.  It tells you how much you can spend in retirement under different scenarios.  Seeing the benefit of Vettese's enhancements for my own situation is very interesting.  The first time I tried the calculator, there were a few hiccups, but they appear to have been fixed.


This is an excellent book that will challenge your preconceived ideas about retirement spending. Anyone with 6-figure or better savings will face difficult choices about how best to spend this money during retirement. Few financial advisors are knowledgeable enough to help much. This book is a good starting place for making these important decisions.


  1. Best book yet that I have read regarding retirement strategies for Canadians. Fred Vettese writes clearly and seems to relish being a contrarian.
    My one beef was his use of nominal values used in his projections. I have always felt that keeping all values in "today's dollars", makes these projections clearer and more meaningful.

    1. @Garth: I agree, but using constant dollars confuses some people. If I were writing a book, I'd probably use constant dollars, but sprinkle reminders about this fact throughout the book.

    2. Part of the reason some are confused may be that most financial planners refuse to use constant dollars as it makes their projected returns look lousy, but as you know, you can only eat real dollars.

    3. @Garth: One of the advantages of planning in real dollars is that you don't have to make separate guesses for market returns and inflation; you just guess some real return. A catch with this, though, is that you pay capital gains taxes on nominal gains instead of real gains.

  2. That is true. Apparently, that is one reason why the inclusion rate is less than 100%.

    I also think that dollar values from the past should be converted to today's dollars...Imagine if everyone quoted what they paid for there homes in constant dollars. Might bring some sanity to the housing market. The real estate industry might object however...

    1. @Garth: Homes are a good example, and I'd like to see people think in real terms in other areas.

  3. Excellent review MJ and it does sound like a good book. Like you I am not convinced about annuities because comparing them is next to impossible based on my research. What's wrong with buying high dividend ETF's like iShares XDIV/XDG and ZDI/ZWC/ZWU covered calls instead? That's what I did with 60% of my retirement investments and I like living off my dividends each month.

    1. @Marko: The potential problem with your strategy is the risk of a market crash. The theories behind buying an annuity with part of your savings is sound, but I have trouble putting it into practice.

    2. Understood MJ but I still get paid my dividends each month whether the markets go up or down. I'm at $38,400 per year in dividends so market fluctuations don't concern me anymore.