Monday, October 14, 2013

Retirement investing: No guarantees

Retirement can be tough. It is not tough for everyone but for those relying on the stock market during retirement it can be one tough, rough ride. If the market suffers a downturn early in one's retirement, one can be forced to dip into the retirement portfolio principle. Dip too often and too deeply, and a retirement portfolio can be forced into a death spiral ending in all too early depletion.

If you are among those Canadian couples able to claim the maximum OAS and CPP payments, as of today you should be able to count on a guaranteed income of a little more than $37,500. You won't be rich, maybe not even comfortable, but you will get by.

I am uncertain about the exact amount as CPP payments are recalculated four times a year. Each January, April, July and October an adjustment is made to counter the effect of inflation. OAS is also rejigged annually but only once a year -- in January.

Unfortunately, the average Canadian does not draw the maximum CPP payment. The average Canadian barely draws more than $600 a month. So an average Canadian couple appears to have a government funded income in retirement of approximately $27,700. Such a pitiful amount demands retirees supplement this income with one or more of the following: a company pension, a RRIF or an annuity.

This where it gets confusing. My wife and I have visited a few financial advisors and they have been a little help but not a lot. The talk is filled with promises but not a lot of substance. When I have forced an answer from an advisor, I have not been happy. And later I have learned, as often as not, that the answers were wrong or incomplete.

For instance, one advisor would not discuss annuities featuring a cost of living increase. Too expensive to buy and too little income delivered, or so I was told. I was never given solid numbers. I was never given the chance to decide for myself.

There are few guarantees in this world and retirement is no different. Facing thirty years or more in retirement, not working but still spending, can be intimidating. And the percentage of one's RRIF portfolio the government demands must be withdrawn annually is downright daunting. At age 71 one must remove about seven percent and this increases with every passing year. Live long enough and the withdrawal rate reaches 20%! One is forced to dip often and far too deeply into one's savings. The withdrawal rules throw a big curve into the retirement game.

At this point, depending upon how much money you've been able to accumulate, considering an annuity of some sort seems prudent. In researching this post I came across the Answers! Numbers! An absolutely great site.

I'm not saying it tells all -- but, it does give one a lot to think about. If one does go to a financial advisor, the knowledge gained from the Retirement Advisor site will put you on a solid footing to discuss retirement income.

Now, I'm going off to play with the RA calculators. There may be no guarantees but there are answers.


  1. Great article!! I think perhaps you missed your calling in life.

    Sad that you get no answers from advisors... I always viewed myself as a guide to my clients. Given them information that allows hem to take action. Depending on your age, annuities can be very attractive. Also with a shorten life expectancy, you can apply for an impaired life annuities (which can potentially spit out larger payments based on a shorten life expectancy).

    CPP maximum is just over $1000 (currently $1012.50) (if you have always contributed up to YMPE. you can order an estimate from service Canada anytime and if you sign up for My account... you can see it anytime.

    OAS max is $550.99.
    You are also correct in saying that they are both indexed.. which is very important especially today as inflation is likely (If you believe long term interest rates will rise (I am in that camp))

    I would state that everyone's lifestyle is different an for some CPP and OAS may very well be sufficient to provide their desired lifestyle... for others not so much.

    The first rule should be to get a better understanding of your lifestyle... how much it costs. Once you have determined that... break expenses into 2 categories... 1) Fixed and 2) Discretionary.

    Now the fixed expenses are the things you require... housing, transportation, food, etc... the "essentials" if you like. You should account for those and that income should last forever and should be indexed to protect against inflation. For many people (assuming they retire with no debts) CPP and OAS may be enough to cover those costs. For those that it does not... and if you want piece of mind (and have no employer pension) perhaps an annuity can provide the required amount to offset those expenses.

    2) Discretionary expenses: These are the fun stuff... trips, hobbies, etc... the things you want to do (as opposed to need to). Figure out annually what that may cost... if you plan on spending months living in a french villa vs. a trip to the States (or an island in the caribbean for a couple of weeks) have an idea of what that retirement looks like and its cost. That should give you a rough estimation of how much $$ you need yearly to retire.

  2. Part II

    Now be honest with life expectancy (if you have no idea google life expectancy tables for Canada). We use them as a guide to give us an idea if client has no idea.

    For many of our clients we discuss what they would like to do... many say travel until I am no longer able (or the insurance rates are just too expensive) for most that age is between 75-80. What we do is then have a discussion (or may up front) about their legacy... what they would like to leave behind (if anything). We discuss their kids, grandkids, etc... Once that discussion is complete and the clients feel (and we feel) we have a good idea... we build a strategy.

    Here is an example... client is 65, has $500,000 in savings and wants to deplete the principle by age 80, but wants to leave $200,000 to his kids/grandkids. They have no debt and CPP/OAS provide enough to support their fixed expenses (and a little savings)

    We will say okay we are looking to deplete $300K in 15 years... I will just do a simple division... $300/15 years, means we have $20,000 per year (pre tax) to use as discretionary expenses. We usually explain to clients that because of interest (we may adjust the income) we will likely get an extra 2-5 years (on the end) so that protects them if their health is better than they expect, or want to take an extra amount out somewhere. That is really the bases for our plan. It's simple, the clients get it, it accomplishes pretty much what the clients want. We review their portfolio yearly and show them what 5% (or whatever % we agree on) interest looks like and compare the actual portfolio vs the expected one to show how the plan is working.
    (We may also look at other alternatives to accomplishing what they want... but to keep things simple I have used an easy example)

    We will look at clawbacks and advise clients, look at tax brackets so clients are well advise off all implications the strategy has...

    We always leave the meeting asking our clients to put together a bucket list (thing they want (or have always wanted) to do but have not had the ability to do.

    Currently we are looking into having a travel consultant on staff to help our client plan those trips (or at least give them estimates of their costs) so our clients feel like those items (on bucket list) are achievable.

  3. Part III

    For myself (as a FA), most of our clients rely on us for guidance and it is a responsibility we take on very seriously. IMO, the most important thing we can do for our clients and make them feel they are in control of their future and understand implication their decision have on their goals whether that be retirement, legacy, etc.... we are just there to assist our clients along their journey and provide council.

    The products we use, strategies used are always competing, we just want to provide our clients we solid advise that accomplishes their goals with the least amount of risk.

    Makes me think of another client we have... that won the lottery... they were in danger on defaulting on their mortgage when they won the lottery and of course the next day they were the bankers best friend.

    Now some years have passed and the client comes into my office (and this is a very simple man). Originally he wanted no risk and all his wife told him is you decide what to do.. all I care about is that there is always enough money deposited into our account monthly to live on forever.

    At the time, I had suggested an annuity for him/her split between many companies (to guarantee a la CDIC) and this would use up about 25% of their winnings and accomplish her goal (and be extremely safe, simple, etc..). He was self employed and always said how nice it would be to get a pension (like the people working at the government)... so here was his chance right?? He would actually not even lose any OAS.

    Nope, the banks talked him into investing with them. Now he has about 35% of his money left and really nothing to show (and of course no OAS). I had a look at his account and it was 65% Fixed Income (which is good for him). His annual fees were $75K/yr so those fees reduced his return to about 3%. He asked me why my office space was not class A like his broker (It took all I had to say transfer your money to me and I will get class A space with that $75K/yr in fees. He had came in because his fees were going up again.. He told me he had a credit card that cost like $5000/yr to have (or something ridiculous), that allowed him into exclusive areas in airports (but he had to pay another $150 each visit (or something), but he doesn't use it because his wife refuses to fly.

    You can see just how crazy this situation is. I have known this client for 10 years plus (before he was a millionaire), he even called me on the golf course to tell me he had won the lottery but somehow he fell into the trap on listening to the sales pitch from the BIG bank.... and I suspect in about 5 years when he has little of his winnings left, he will tell me... I should have listened to you...

    Sadly I am find this situation difficult to watch it all blow up... and frustrating because I know had he listened to me he and many, many generations of this family would be set for a very long time...

  4. Thanks for the link to It is very interesting, and thanks to Anonymous for his informative comments