Thursday, November 18, 2021

The Procrastinator’s Guide to Retirement

David Trahair’s recent book The Procrastinator’s Guide to Retirement has a great title.  With so many Canadians fearful that they’re way behind on retirement readiness, this book seems like it could rescue them.  Unfortunately, the actual contents leave a lot to be desired.

The main idea is that if you save a lot of money every year during your last decade of work, you can build an acceptable retirement.  There are detailed examples overflowing with numbers where people whose big mortgage and child expenses fall away in time for a decade-long sprint to retirement.  However, if you can’t suddenly save a lot of money every year, this book offers no magic for building wealth.

Questionable Analyses and Advice

A chapter on whether to contribute to an RRSP or pay down your mortgage begins with a question whose answer “is obvious”: “Should I contribute to my RRSP or pay down my credit card, which is charging me 20 percent interest per year?”  Trahair proceeds to explain in detail that you’d have to earn a 28.6% return on your RRSP investment to do as well as paying down your credit card debt (assuming a 30% marginal tax rate).  However, he failed to take into account the tax deduction: you really need to earn ‘just’ a 20% return to do as well as paying off the credit card.  The curious thing is that he properly takes into account the RRSP tax deduction in an example on the next page.

“Contrary to what many people think, some professional money managers do consistently beat the market.”  “Simple strategies like ‘buy and hold’ may not work well.”  Steering readers to chase star mutual fund managers and market timing is terrible advice.

“Many people focus too much on fees.  Fees are a necessary part of the equation, but they can only be judged when compared to the value received.”  “That value should be measured in a performance report that shows rate of return (net of fees) compared to the relevant benchmark index.”  This just steers readers to the failed strategy of piling into last year’s best-performing mutual fund.

In a discussion of when to start CPP, Trahair says you need to ask yourself 4 questions.

1. “Do you need the money early?”  Without context, this is hard to answer properly.  It often makes sense to spend from your RRSP for a while and delay CPP, but a reader who thinks RRSPs should be preserved until age 71 might give the wrong answer for his or her case.

2. “If you don’t really need the money, are you in a low tax bracket?”  The idea is to take CPP early to boost a low taxable income, but once again, it may be better to boost income by drawing from RRSPs.

3. “Can you shelter your CPP pension from tax?”  The idea is that if you have RRSP room available, you can use your CPP to build RRSP savings.  This is often the opposite of what people should do, depending on other factors.

4. “Do you think your RRSP will grow at a higher rate than the penalty to elect early [7.2% per year] or the bonus to wait [8.4% per year]?”  Because CPP is indexed, these returns are above inflation.  Asking readers if they can beat these rates is mostly an overconfidence test.  To Trahair’s credit, he points out that “Those rates will be extremely difficult to beat after investment fees on a consistent basis.”

In an homage to one of his earlier books (that is no better than this one) Enough Bull: How to Retire Well Without the Stock Market, Mutual Funds, or Even an Investment Advisor (my review here), Trahair suggests “Maybe Simple GICs Are All Your Need.”

“In Canada, males who reach the age of sixty-five are likely to live to age eighty-four (nineteen more years), and females who reach sixty-five can generally expect to live to age eighty-seven (twenty-two more years).”  “You should assume that you need to budget for approximately twenty years of retirement after age sixty-five.”  How does that make any sense?  That leaves about half of all people completely out of savings while they’re still kicking.  I guess the other half won’t need to eat cat food.

Another section promotes the idea of leasing a car in retirement to improve cash flow.  Auto dealerships love this idea.

Some Good Points


This book has some good points.  One that stood out for me concerned mutual fund dealers.

“I once had a client who had just emerged from bankruptcy, and her advisor was strongly pushing her to take out a loan to make an RRSP contribution.  She couldn’t control her spending but was being advised to immediately load up on more debt!  It didn’t make sense, but this kind of sales advice is often the result when there is financial incentive to sell, sell, sell.”

“Which fund do you think your advisor would rather sell you: Fund A, which pays him and his firm a trailer fee of 0.75 percent a year, or Fund B, which pays them 0.15 percent a year?  Of course, it is Fund A.  Which fund is better for you?  Fund B.  It’s a total conflict of interest.”

Conclusion


This book has a great title to draw in readers, but I can’t recommend its contents.

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