Thursday, January 14, 2021

The Sleep-Easy Retirement Guide

There are many big questions when it comes to retirement and David Aston meets them head on in his thoughtful book The Sleep-Easy Retirement Guide: Answers to the Biggest Financial Questions That Keep You Up at Night.  His style is to discuss the advantages and disadvantages of different courses of action which works very well for the big questions he tackles.

The main audience for this book is “relatively knowledgeable readers” and “the seasoned investor” who need help “answering the more complex and challenging questions.”  The first question sets the tone for the rest of the book: “How can I fit my retirement dreams within my financial reality?”

The Big Questions

In the chapter covering, “How big a nest egg will I need?,” the author does an excellent job making it clear that the safe starting withdrawal rate depends on how old you are when you retire, a fact that too many commentators miss.  For those retiring at 65, he suggests the default starting withdrawal rate is 4%.  But he “recommends reducing the withdrawal rate by 0.1 percentage point per year for retiring between age 60 and 64, and increasing it by 0.1 percentage point per year for retiring between age 66 and 70.”  He goes on to identify other reasons why you might adjust this withdrawal rate up or down.

In answering the question “How much do I need to save each year?,” instead of focusing on a single saving rate, Aston identifies multiple patterns of saving (steady saving, gradual ramp-up, and saving after the mortgage is gone), and shows the savings rate needed for each pattern.  This is just one example of the many ways he recognizes that different people often need different approaches.

When answering the “How long do I need to work?” question, the author gives a detailed example showing how working an extra year or two or three affects your ultimate retirement cash flow.  It’s hard to decide how long to work without such a detailed accounting of how much working longer helps.  One quibble I have is that he didn’t account for the fact that delaying CPP payments causes them to rise with wage inflation rather than CPI inflation even though he points this fact out later: “wages have grown roughly one percentage point faster on average than consumer prices, so chances are that the impact of different indexing factors will grow your CPP entitlement a little faster by deferring it rather than starting it.”

For the “How much should I plan to spend in retirement?” question, Aston gives profiles of several couples and singles along with numerical examples of basic, average, and deluxe retirements.  This gives readers an understanding of what type of retirement they can expect for a given annual spending level.

For the “How much can I draw from my savings each year?” question, the author offers a range of possible answers depending on your risk tolerance and desires in retirement.  One possibility to boost initial spending is to “commit to a real spending decrease of 1% a year every year.”  This idea is backed up by studies showing that this is what the average retiree does.  It’s easy to imagine an elderly version of yourself spending little, but you have to ask yourself if you’d really want to spend less every year, even in your 60s.  These studies average together data from people who choose to spend less as they age with people who are forced to spend less because they’ve overspent early on.

The answers to the question “How do I manage my investments in retirement to make my money last?” include the possibility of buying an annuity.  I particularly like the focus on annuities whose payments rise by 2% each year.  This isn’t a perfect offset to inflation, but it’s far better than fixed annuities (the most common type) that leave you watching your payments drop to half or one-third of their original buying power in your old age.

For the “How can I use the value of my home to help my retirement?” question, the main possibilities are to downsize early or to plan to tap into your home’s value only as a last resort.  However, the claim that “Rental costs usually far exceed owner-specific costs borne by homeowners” requires that we ignore the cost of capital tied up in a paid-for home.  Today’s high housing costs make renting look like the better financial choice.  I prefer to own, but that doesn’t make it better than renting financially.

The chapter on retirement homes, independent living, assisted living, and nursing homes is very informative and thorough.  There is a wide range of options at different price levels that are potentially better than suffering isolation in your home and paying for expensive in-home help.  “While many seniors are intent on staying in their own traditional family home as long as possible, what is often overlooked is that a retirement home can be a home too, after you get accustomed and then attached to your new locale and make friends among fellow residents.”  Aston considers the case for long-term care insurance to be dubious: “needing long-term care isn’t really a low probability event.  … That necessarily means that LTCI premiums are relatively expensive compared to the potential payouts they generate.”  Further, the existence of government supported nursing homes means that “To an extent at least, the government has your back already.”

For the “How can I save my retirement if my finances get off track?” question, Aston splits it into cases where your retirement is far off, it’s almost here, and you’re already retired.  The longer you have until retirement, the more choices you have for getting back on track.  For people making good money and who aren’t sure they have enough saved, “it’s probably a good idea to try to hold on to your career job a bit longer, because once you give it up, it’s usually tricky to find another job with equal earning power.”


The discussion about how much we can expect from CPP and OAS and when we should start them is better than I’ve seen from many other commentators, but I have some concerns.  Most people have a strong bias towards taking CPP and OAS as soon as possible for mostly emotional reasons.  It’s difficult to give an objective overview of CPP and OAS without playing into this bias.  Some obvious reasons to take CPP and OAS early are if “your health is poor” or “you need the cash flow.”  However, this isn’t the same as being worried you might die young or that you want the cash flow.

Aston says that CPP and OAS are designed to be “actuarially neutral” and that “you won’t usually go too far wrong if you start them any time after you retire and are eligible.”  I already have a post explaining that CPP and OAS don’t look actuarially neutral from the point of view of Canadians who are forced to plan for a long life because they don’t know how long they’ll live.

Another possible problem with delaying CPP and OAS to age 70 that Aston describes is for a couple who spend down their savings in their 60s but one spouse dies near age 70.  This eliminates that spouse’s CPP and OAS and replaces it with a small CPP survivor pension.  This scenario sounds scary and without any means of quantifying the change to cash flow, it’s difficult to tell if you should be concerned.  I crunched the numbers for my own case, and my wife’s standard of living would actually increase if I died at 70, but that only applies to us.  The book would serve its readers better if it contained some example scenarios to show when this problem arises and how severe it is.  Otherwise, it’s just another vague fear driving people to take CPP and OAS early.

The book cites another reason for possibly taking CPP early: “You’ve spent lots of time out of the workforce.”  For technical reasons (related to years with low CPP contributions that you’re allowed to “drop out” from the CPP benefits calculation), if you have several low income years, and you don’t work from age 60 to 65, the boost you get from delaying CPP won’t be as large as it could have been.  This applies to me.  However, I’m still much better off taking CPP at 70.  So, this situation is just a factor to consider rather than a reason on its own for taking CPP early.

The first reason cited for taking CPP later is “You have above-average life expectancy.”  This is true but somewhat misleading.  You don’t need to be healthier than average.  As long as living longer than average is a possibility you can’t ignore in your planning, then you have to stretch out your savings, and delaying CPP and OAS might help improve cash flow.

“Retirement expert and author Fred Vettese says the CPP deferral rates incorporate the assumption of close to a 4% ‘real’ return after adjusting for inflation.”  It’s important to put this into context or else investors who think they can beat a real 4% return will think they’re better off taking CPP early and investing the money.  The 4% real return baked into CPP deferral applies only if you have an average lifespan.  When you consider the possibility of living to 95, the rate jumps to 7% above inflation.  Only overconfident investors believe they are likely to beat inflation by a compound average of 7% per year for the next 30 or more years.

An excellent point: It “doesn’t make sense to consider purchasing an annuity without giving serious consideration first to enhancing your CPP pension by deferring it.  In essence, CPP is a superior form of annuity (indexed for inflation, unlike the kind available for purchase, which is not) that comes with attractive terms for deferral.”

Active Investing

The author is too optimistic about the possibility of hard-working investors outperforming the market with security selection or market timing.  The evidence is clear that in recent decades, stock picking is so competitive that few professional investors have much hope in beating the markets, except by luck.  Individual investors have less hope.

In a discussion of bucket investing (one bucket for cash and another for the rest of your portfolio), if there is a downturn, Aston advises shifting spending to the cash bucket, only “selling long-term assets when prices are favourable,” and possibly “postponing the regular rebalancing of your portfolio.”  This all sounds reasonable enough until you try to implement it and realize you’re forced to make frequent judgment calls about what constitutes a downturn.  I prefer a purely mechanical strategy where my judgment isn’t involved.

One of the investing strategies suggested is choosing dividend stocks for income.  We’re to “look for profitable, well-managed, blue-chip companies with sound balance sheets.  The proportion of profits paid out in dividends (known as the ‘payout ratio’) should be within reasonable limits for that industry.  The companies should have strong competitive positions in stable industries that are growing.”  The vast majority of investors who work at this diligently will just make random selections based on past results that look good.

A “moderately knowledgeable investor” “can adopt a … do-it-yourself approach to create a portfolio using individual stocks, bonds and GICs.”  I disagree that this path makes sense for a moderately knowledgeable investor.  Even most professional investors fare poorly.

“I believe the key to superior investment selection for many active brokers is to make effective use of a top-notch research department by closely following their recommendations on specific stocks and other investments suitable for specific types of clients.”  I don’t believe this is likely to give good results.

A good advisor “should be able to provide a comparison for you of the historical performance of the investments they use or recommend against a market benchmark.”  This is too easy for an advisor to game by shopping for benchmarks with weak results.


This book tackles head on most of the questions we have about preparing for retirement.  It covers a wide range of possible solutions to these big challenges.  Knowledgeable readers won’t get prescriptions for exactly what to do and won’t agree with everything they read, but they will learn useful ways to think about the problems and new ideas for solving them.


  1. "The 4% real return baked into CPP deferral applies only if you have an average lifespan."

    What doesn't get mentioned often is that CPP deferral is also tax deferred. Between the ages of 60-70, you can try to beat the return of CPP deferral. With taxable fixed income, that will be difficult for many.

    Also, CPP deferral will make the portfolio of many more diversified. This assumes that you consider CPP as a fixed income asset, and some will disagree with that contention.

    1. Anonymous,

      Your tax deferral point is certainly relevant to those who have non-registered investments.

      In some ways, CPP is the ultimate in fixed income. You'll get payments whose buying power will never decline, and those payments will never end (as long as you live). That beats anything else I can buy from the fixed-income realm.

  2. There are several situation where the government gives a tax breaks to individuals. Some that get discussed are the TFSA, RRSP, some types of life insurance and the cap gains exemption on a personal residence. One that doesn't get discussed often is that homeowners don't get taxed on implied rent; I believe they do in Switzerland. And the tax deferral of CPP deferral and OAS deferral aren't discussed much also. The higher the tax rate and the higher the inflation rate, the more that tax deferral is worth. To take an extreme example, many Canadians can remember an inflation rate of 12.47% (1981). Another extreme example is a tax rate of 54% (Nova Scotia). Assume an inflation rate of 12% and a tax rate of 50%. With a 4% real return, your aftertax return is a negative 4%.

    1. Anonymous,

      Yes, the tax deferral on CPP is as valuable as RRSPs, and this is particularly important to those who have used all their RRSP and TFSA room.

  3. Other tax advantages of CPP in general are the tax credits/deductions associated with it. And CPPIB doesn't pay any Canadian taxes; correct me if I'm wrong on that. The reason I'm bringing this up is that if your marginal tax rate is on the higher side, taxable fixed income is basically a money loser.