Appendix A

Summary of Takeaways

The most important takeaways are highlighted in boldface.

Chapter Takeaways

Chapter 1

  1. This book is for people who are close to retirement, or who are already retired, and who are going to rely heavily on their own savings to meet their retirement income needs.
  2. It is assumed that your primary goal is to maximize your retirement income rather than maximizing the assets you leave behind if you die early.

Chapter 2

  1. A conventional decumulation strategy sounds like a prudent course to follow, but it can lead to disaster.

Chapter 3

  1. Decumulation is not as straightforward as it seems; disaster can strike even if you save a lot and follow a widely accepted decumulation strategy.
  2. The 4-percent rule doesn’t work when investment returns are very poor.

Chapter 4

  1. Most spending shocks that you are likely to encounter in retirement are modest enough to be manageable.
  2. The biggest spending shocks tend to be events involving family members, like divorce or extending financial support to a grown-up child.
  3. Contribute 3 to 5 percent of your income to a reserve fund until age 75 or so, and use this reserve to cover spending shocks.

Chapter 5

  1. Spending by retirees tends to rise more slowly than inflation, especially between ages 70 and 90. This is true even if they have the financial means to spend more.

Chapter 6

  1. Investment losses will happen every so often; a good decumulation strategy should be able to absorb them.
  2. Withdrawing the same percentage of assets each year does not work well. In general, you need to withdraw an increasing percentage of your assets with age.
  3. Most retirees want to leave the principal amount of their nest egg intact, but this strategy makes sense only at the extremes of wealth.
  4. Withdrawing the minimum amount permitted under the RRIF rules is not a bad decumulation strategy, but you can do better.

Chapter 7

  1. Future investment returns will almost certainly be lower than historical returns for many years to come.
  2. You might be able to avoid 5th-percentile investment returns by putting all your money in a savings account.
  3. Stay away from investing in second mortgages.
  4. Real estate investing can be lucrative for long-term investors, but it is not for amateurs and it is not without risks.
  5. You might invest some of your savings in T-bills or other short-term investments but only a smallish portion.
  6. Long-term bonds will be especially poor performers, since bond yields have nowhere to go but up, and this would create capital losses. This includes real return bonds.
  7. Your best bet for a 5 percent annual return is to invest in equity funds, risky as they are.
  8. A 60-40 asset mix is probably better than 50-50 in the case of retirees with average risk tolerance.

Chapter 8

  1. Black swan events can lead to unusually severe bear markets that can disrupt your retirement planning.
  2. The last 70 years of bear markets suggest it is best to stay fully invested during a market downturn, but a bear market brought on by a black swan event may be different.
  3. You might consider reducing your equity exposure on the way down but only if you are prepared to miss the subsequent market recovery.

Chapter 9

  1. Before embarking on the enhancements, you should get your finances in order by going through the checklist.

Chapter 10

  1. Reducing investment fees can significantly increase one’s retirement income.
  2. Actively managed funds are more expensive than passively managed funds, like ETFs, but with no evidence that they add value when you take fees into account.
  3. Using passively managed ETFs, the total annual investment fee can be brought down to about 0.45 to 0.6 percent if you use a robo-advisor, less if you do it all yourself.

Chapter 11

  1. Deferring CPP pension to age 70 forces you to draw down your RRIF assets (or other assets) more quickly before age 70, but those same assets last longer because the CPP pension from age 70 and on is so much bigger.
  2. Enhancement 2 greatly reduces the income gap at older ages for middle-income couples like the Thompsons.

Chapter 12

  1. Enhancement 2 provides significant protection against investment risk as well as longevity risk.
  2. There are many reasons for not deferring CPP pension to age 70, but most of them do not hold up to close scrutiny.
  3. About the only good reason not to defer CPP to 70 is having insufficient assets to tide you over until CPP starts.
  4. You probably will not want to defer your OAS pension unless your income after 65 is high enough to be subject to the OAS clawback rules.

Chapter 13

  1. If you have a spouse and intend to buy an annuity, it should be a joint and survivor annuity so that payments continue to be made to the surviving spouse.
  2. Don’t even think about buying an indexed annuity.
  3. Buying an annuity is not as effective a strategy as it used to be now that interest rates are so low. That can change, though.
  4. You should be earmarking about 20 percent of your tax-sheltered assets for the purchase of an annuity at the point of retirement.
  5. It is tempting to wait until you’re older, like 75, to buy an annuity and in fact you’ll be better off than buying one at 65 assuming you don’t suffer any investment losses in the interim. This, however, is a dangerous assumption to make.
  6. While it is early days, an ALDA does not look like a very effective retirement income vehicle.

Chapter 14

  1. Enhancement 1 is a no-brainer.
  2. We already know that Enhancements 2 and 3 should help in a worst-case scenario because both are a form of insurance against poor returns and a long lifespan.
  3. What is a bonus is finding that Enhancements 2 and 3 add value even if one achieves median investment returns.

Chapter 15

  1. Without knowing how much income you can safely draw each year, Enhancements 2 and 3 are virtually useless.
  2. You can use PERC (an online calculator) to determine how much income you can draw from all sources.
  3. There is no charge to use PERC.
  4. It is important to revisit PERC on a regular basis, say annually.

Chapter 16

  1. If all else fails, a reverse mortgage can provide much-needed income late in retirement.
  2. It is better not to secure a reverse mortgage too early. Wait until age 75 or so but don’t wait too long.
  3. For a retiree, a reverse mortgage is generally a more viable option than a HELOC.

Chapter 17

  1. Enhancements 2 and 3 are essentially insurance against living a very long life.
  2. Even if one spouse dies young, the surviving spouse is still financially better off if the couple had adopted Enhancements 2 and 3 at the point of retirement.

Chapter 18

  1. There are at least two other types of retirees, Super-Savers and YOLOs. The decumulation strategy presented in Part II works for them as well, but with some tweaks.

Chapter 19

  1. Retiring early is much more of a challenge than waiting until age 65. Not only do your savings produce much less income, you pay more in income tax.
  2. If you retire early, it takes much more assets to put Enhancement 2 into effect.
  3. If you stop working before age 65, you are still better off waiting until 65 or later to collect CPP (assuming you have enough other assets), in spite of the dilution caused by a few more years of no CPP contributions.

Chapter 20

  1. PERC can be a useful tool to tweak your retirement planning if you still plan to work a few more years.

Chapter 21

  1. PERC is useful in taking an assortment of “lumpy” assets from many sources and turning them into a smooth income stream.
  2. If you want to create a smooth income stream, you may have to sell off illiquid assets such as an investment property, sooner than you otherwise would.

Chapter 22

  1. Enhancement 1 is hugely important for high-net-worth couples. So is Enhancement 4.
  2. Enhancements 2 and 3 also have a positive effect for high-net-worth couples, but they are not nearly as important as they are for middle-income retirees.
  3. High-net-worth couples should also defer OAS to 70.

Chapter 23

  1. Ultimately, the real goal is to maximize your after-tax income, not your gross income.

Chapter 24

  1. The enhancements are just as important for single retirees as they are for couples.
  2. Government pensions will be a dominant factor for a retiree who is single with less than half a million in assets, especially if she defers CPP until 70. This is a good thing since it takes much of the uncertainty out of decumulation.

Chapter 25

  1. Most bequests are accidental in nature, meaning that the names of the heirs are known but the amount being inherited is not guaranteed.
  2. In the case of retirees who have substantial equity in their home and otherwise follow the decumulation strategy in this book, their heirs can expect to receive a significant if unspecified amount on the death of the surviving spouse.
  3. You pay a price for making a large bequest. It can restrict your choice of investment vehicles at retirement and reduce your retirement income.
  4. You should be drawing down your financial assets as you get older, which means any accidental bequest will gradually become smaller. Your children’s need for the money should also diminish as they progress into later adulthood.
  5. Be cautious about taking into account a potential future inheritance when calculating your retirement income. Note, though, that PERC allows for it.

Chapter 26

  1. The decumulation strategies presented in this book are widely accepted in the academic community.

Chapter 27

  1. There are four ways to bring to life the decumulation strategy recommended in this book: using a robo-advisor, the DIY approach, through traditional financial advisors, or through your employer.
  2. The DIY approach is cheapest, but you need to navigate around the pitfalls. It is not for the novice or the faint of heart.
  3. Financial advisors are the most natural source for help, but the solutions presented in this book may conflict with how they are remunerated. In addition, the cost of an advisor offsets the benefits of Enhancement 1.
  4. If you accumulated most of your savings through a workplace plan, your employer may be prepared to offer ongoing support, at least to see you through the transition into retirement. You should probably use it.
  5. Robo-advisors may be the most sensible route for most retirees.

Chapter 28

  1. Employers have an excellent business case for maintaining a pension plan for their employees. It indirectly results in better employee performance as well as a better public image for the organization.
  2. That same business case strongly suggests that employer support should continue beyond retirement.
  3. There are a variety of reasons why employers currently help so little during the decumulation phase, but the tide is turning.