Life After Full-time Work Blog

I love Frederick Vettese’s new book

There are many reasons I like this book so much. I recommend it heartily.

One reason is the subtitle (and all that it implies). It’s “Getting more without saving more.” The standard approaches to increasing retirement income start with saving more and delaying retirement and perhaps taking more investment risk. Those don’t feature here. So this is an intensely practical book about making the most of opportunities (which the average person doesn’t think of) to increase your income without sacrifice or deliberately adding risk. That alone makes the book excellent. There are five such potential enhancement opportunities, and I’ll mention them explicitly. But first, the other reasons I’m such a huge fan.

The second reason is the way the book is written. The tone is deliberately conversational. If you know Fred, you could imagine him speaking to you in the words he uses. That makes it easy reading – a big plus in a book on a technical subject.

The third reason is that anyone, anywhere, can use the book. Is it directed at the world, in general? No, it isn’t. The target audience is Canadians who are ready to turn their accumulated savings into retirement income, and would like to maximize that income. If this is you, you have no large income promised by a workplace defined benefit plan. And you have no explicit bequest motive, being happy to have your heirs inherit whatever is left after you and your partner pass. (I’ll mention bequests again later.)

So, isn’t that reference to Canadians a limiting factor? Partly, yes; but mostly, no. That’s because the principles involved in the five enhancements apply in many countries around the world, and it’s easy to adapt what Fred says to the situations in other countries.

Fourth, I really like his fundamental teaching approach. His basic example is examined in great detail, in order to show how the enhancements work, and it consists of a couple, Nick (65) and Susan Thompson (62), who are typical of mainstream retiress, and are trying to do everything right as they contemplate immediate retirement. They’ve got rid of their debts. They invest in well-known mutual funds, with an overall asset allocation of 60% in equities (seeking growth) and 40% in fixed income (to produce some stability in the returns). The painless and unnoticed fee attached to this approach is 180 basis points (that is, 1.8% of the remaining assets) each year. They plan to draw down 4% of their total assets in the first year, and then increase that dollar amount by the amount of inflation each year after that (the well-known 4% rule). They avoid buying annuities. They start their “universal” (i.e. state) pensions immediately on retirement. They’re assuming inflation at 5% a year for the first two years, then 2.2% a year after that.

All in all, not bad. And at least it’s a plan!

But events conspire against them. They experience a grim scenario, which they didn’t anticipate. Their returns aren’t average; in fact, they’re consistently at the 10th percentile of a reasonable range (essentially, among the worst 10% of possible returns). And they encounter spending shocks: expected roofing problems 5 years into retirement, outflow to help their son buy his first house in year 8, a health procedure in year 13, and Nick’s death at age 85, upon which Susan’s income drops by 30%.

Even before the potential enhancements, Fred suggests setting aside 3-5% of spendable income each year as a reserve for spending shocks, until their mid- to late-80s. In addition, they should reduce their projected spending targets 1% a year through their 70s, then 2% a year from Nick’s age 80-84, gradually making further decreases down to 1% a year, at 90; then keep it constant after that. (That’s because retiree spending tends to increase slower than inflation, and typically by age 80 retirees reach a slow-go spending pattern rather than the initial go-go spending pattern.)

And yes, they do all this, to adjust their initial plan. This revised and improved plan is the base case for them, and for Fred.

Now the potential enhancements, each of which is shown with explicit numbers and charts as to how they affect the retirement income. Obviously I’ll give you the bare bones here – the book explains them in detail.

Enhancement #1: Reduce fees. By investing in passive ETFs (exchange-traded funds), they reduce their annual fee to 0.6% (though it could have gone much lower). This improves their financial picture, but not enough to hit their revised target planned income.

Enhancement #2: Transfer risk to the government. Huh? What Fred means is: postpone taking their “universal” Canada/Quebec Pension Plan income until the latest possible age (70 in Canada), drawing down from other assets until then. This enhancement makes them OK. This approach, which (as in Canada) assumes an inflation-indexed universal income payable for life, gets a high reward (from the Canadian government) for postponement. (Fred then adds a chapter on why so few people do this #2 strategy.)

Enhancement #3: Transfer even more risk. How? By buying an annuity. In other words, the risk that is transferred is the risk of living longer than expected. The Thompsons buy a joint-and-two-thirds-survivor annuity at retirement, with 20% of their assets. This annuity is not indexed to inflation, but it solves most of the problem of outliving their life expectancies.

Enhancement #4: Use PERC, that is, Fred’s Personal Enhanced Retirement calculator, freely available at perc-pro.ca. There are also some ways to do even better, e.g. through new longevity-pooling products. Fred shows how to optimize the enhancement.

Enhancement #5: Have a backstop. This is a new scenario for the Thompsons, who actually don’t do all of #1 through #4, and also suffer two more setbacks: Nick dies at 80, and inflation is 5% for the first 3 years, not just the first 2. This is where Fred discusses reverse mortgages, and home equity lines of credit (HELOCs).

I know I haven’t provided every detail, for those of you who are keen to define exactly what the Thompsons plan and then experience. That would take too long. Get the book!

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I’ve given you four reasons I’m so keen on the book. Here’s a fifth. Fred completes the picture. He actually starts the book with a clear identification of the decumulation problem. And after his five potential enhancements (I say “potential” because some may not be feasible in every country) he explores other situations, that differ from the circumstances that define the Thompsons. He adds a further section on tying up loose ends (tax, real estate, inflation, what happens if investment returns are actually good, what if you’re a super-saver or a YOLO type, and tying in bequests).

And finally – just to ensure this isn’t all a theoretical discussion – how to make it all happen.

Yes, I love the book.

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Why do I refer to the author as Fred? Because I’ve known him for some years and am glad that we’re friends. It’s a shame – to me, at any rate – that we were not closer professionally. There were some years when Fred was chief actuary of Morneau Shepell (now LifeWorks) and I was a director of a subsidiary (Morneau Shepell Asset and Risk Management); but we never worked together. A pity!

It goes without saying that we have never had any financial ties.

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My heartfelt thanks to everyone who responded to my request for help with my own proposed new book. I’ve responded to all of you, and you have given me some very useful ideas. Lots of re-writing will now be necessary!

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Takeaway

From Fred’s book, prospective retirees around the world will learn a lot of useful techniques to enhance their retirement income.

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