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Newly revised to include the financial fallout of COVID-19, the book Retirement Income For Life by retired actuary Fred Vettese offers strategies for Canadians at different income levels who want to approach their "golden years" wisely.
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!
MoneySense Investing Editor at Large Jonathan Chevreau is also founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected]
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Hi..this is my situation:
My wife is 70 and she is getting about 300 monthly from Quebec pension and about 270 from Old pension .
I am 73 and i am getting about the same amount from Quebec and Federal , monthly.Together , we are getting 1.100 monthly for the 2 pension Quebec and Old pensions.
Also , because this small amount we have not choise that keep working because our family budget is about 5.000 per month.
What do you think about our situation .
Thanks in advance
Milton Romero
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
I am 64 and already retired. I have no DB pension. I have decided to wait until 70 for my CPP. I have more then enough non registered funds to get to 70.
My question is why not wait until I am 70 also for my OAS? I know I will not be clawed back.
More people seem to delay there CPP and not there OAS.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
Delaying OAS might not always be beneficial. Consider the situation where a person has no db pension, but a healthy RRSP and LIRA (along with a comfortable dividend paying non-registered nest egg.). Retirement projections indicate that letting the registered account compound tax free until 71 is overall more favourable than starting distributions from them earlier. When the LIF and RRIF do kick in at 72, OAS will be fully clawed back. So the choice is to start OAS at 65 and get some OAS from age 65 to age 72, or delay it until age 70 and get essentially none. Comprehensive tax-true financial modelling software, such as Money Ready App (no affiliation, but totally impressed by it), is invaluable when looking at optimizing retirement income.
Consider 2020 as an example. Your LIRA account and RRSP could have dropped 30%. Dividend Aristocrats kept paying dividends. Better to use the riskier registered assets first and let the dividends grow. OAS and CPP for a backstop that probably will never be needed. Can never understand why people are upset that they won’t get government benefits. Consider yourself fortunate. You have won. Don’t try and overthink and maneuver to cut off your nose to spite your face.
My wife and I paid off our modest house here in the Oshawa and never got back into debt. We never liked annuities but life annuities or joint annuities are too risky for us. We could die tomorrow and leave our kids with nothing.
We are mortgage, debt free, we basically need $2,700 a month after we pay for all our income taxes, property taxes, all our living expenses. We set up our RRIF to always outpace our minimum yearly required withdrawal at 65. We get our 6.25% on our declining balance which meets the CRA minimum yearly required withdrawal until we are ages 87 when all the RRIF depletes if we live that long.
We get our yearly $23,000 a year RRIF GIC income and our CPP, OAS another $2,400 a month and we are good. We have our $21,000 a year or so let every year to top up our TFSA’s $11,000 per year in 5 to 7 year GIC’s and $10,000 goes into savings accounts, laddered 1 year to 5 year GIC’s.