If you’re a typical reader of this column, I’m guessing retirement is on the near-term horizon for you, or already arrived in the form of “semi-retirement.” And if you’ve diligently saved in registered and taxable plans all these decades but lack an employer-sponsored defined benefit (DB) pension plan, you may be greeting the prospect of foregoing continued employment income with some trepidation.
Interest rates have never been lower, meaning your safe fixed-income investments (like GICs) pay you practically nothing in terms of real, inflation-adjusted retirement income. Dividend-paying stocks pay better, especially after taxes if they’re Canadian stocks, but after stock-market scares of 2008 and March 2020, an overweight position in stocks is hardly going to let you sleep at night the way a taxpayer-guaranteed, inflation-indexed DB pension is going to.
Sadly, such pensions are increasingly rare in the private sector. So what to do? I’d consult the newly revised edition of his book Retirement Income For Life by retired actuary Fred Vettese.
Sharp-eyed MoneySense readers may realize we reviewed the original edition when it first came out in 2018 (which you can find here). I rarely review second editions, but so much has happened that I felt this one was worth another look. For one, Vettese has revised and expanded the book to the spring of 2020, allowing him to look at the COVID-19 issue and how an extended pandemic-related bear market could put further wrenches in retirement plans.
Secondly, if you’re like my wife and me, by now you have reached age 65 or even 70, and once-hypothetical questions like when to start receiving CPP and OAS benefits become even more urgent. The book describes several “enhancements” to a base case of an average almost-retired couple with no DB pensions and roughly $600,000 in savings. This base case—Vettese dubs them the Thompson family—pay high investment management fees (on the order of 2%, typically via mutual funds).
Couples in his base case also tend to take CPP as soon as it’s on offer at age 60, and OAS as soon as possible, at age 65. Vettese continues to pound the table about the value of these government pensions. Remember, in the absence of a DB plan, CPP and OAS are worth their weight in gold, being government-guaranteed-for-life sources of income that are inflation-indexed to boot. Vettese has made his arguments often before, so suffice it to say one of his “enhancements” is to delay taking CPP until age 70 if at all possible.
He’s fine with ordinary average folk taking OAS at 65, as I did myself, for reasons explained a few years ago in this column. However—and this seemed new to me—in a section of the book for high-net worth couples (which he defines as having $3 million in investable assets), he suggests they should also delay OAS to age 70, along with CPP.
As an actuary, Vettese sees this enhancement as a simple case of transferring risk from a retiree’s shoulders to the government’s. Why worry about investment risk and longevity risk when the government can worry about it on your behalf?
Similarly, a related enhancement is to engage in the same type of risk transfer by converting a portion of registered savings to the shoulders of life insurance companies. He suggests 20% can be annuitized, ideally after age 70. That’s a bit less than the 30% immediately upon retirement, which he recommended in the book’s first edition.
True, at today’s paltry rates of interest, annuities are less tempting than they once might have been, but they get better the closer you are to death. As you age, mortality credits start to become attractive (somewhat like in Moshe Milvesky’s tontine writings, those who live longer benefit from the savings of those unfortunate to die earlier than hoped).
One of Vettese’s enhancements to the base case is simple enough: to cut investment management fees. Larry Bates devoted an entire book to this theme: Beat the Bank, which I reviewed two years ago here.
There are two other less compelling enhancements: knowing how much income to draw; and having a backstop. The former can be figured out with a free calculator that Vettese twigs readers to: PERC, or the Personal Enhanced Retirement Calculator.
It’s a useful tool that generated most of the charts found in the book, showing at a glance how these enhancements can boost the mix of variable and secure income year by year, and how much you can spend.
For most, the first three enhancements should do the trick, although it’s too late for me personally. I already took CPP at age 66 (as explained in another MoneySense column), but Vettese’s new edition did have the effect of strengthening my resolve to avoid starting CPP for my wife until age 70: she’s a year younger but has no employer pension plan. I rationalize that’s a bit like splitting the difference and taking it at age 68 on average. Not as good as 70, but a lot better than 60!
If readers are ambivalent about Vettese’s recommendation, as evidently I was, be aware there is a second point of view on the wisdom of delaying government pensions. It’s contained in a just-published follow-up to Daryl Diamond’s Your Retirement Income Blueprint. His new book is called Retirement for the Record: Planning Reliable Income for Your Lifetime…to the Soundtrack of Your Life.
“Give serious consideration to first using those income streams that disappear when you do,” Diamond writes, “My preference is to use first any income streams that run out (or reduce) when the client passes away, rather than tapping into personal assets that have both a survivor and estate benefit.… This is another factor in favour of taking government benefits early, because payouts of OAS stop on the death of the retiree and their CPP pension either ends or reduces for the survivor.”
Still torn? Do what we did, and split the difference!
MORE FROM RETIRED MONEY:
- The lowdown on Vanguard’s Retirement Income ETF: can you rely on its 4% payout target?
- Should you delay your retirement because of COVID-19?
- Reconsidering when to take CPP benefits amid COVID-19 risk
- When is the best time to start taking your CPP payments?
- Is early retirement a realistic goal for most people?
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