Friday, December 21, 2012

Becoming a RetireWare User

Free version of RetireWare

You can register for a RetireWare account!

Everyone who registered will receive an invitation in the next few weeks.

This product is new and we are still testing the application, resolving issues and making improvements. Please report any bugs or functionality problems.

You may find that some pages are slow to load. Please be patient, speed will improve over time as we scale and optimize the application.

If you have suggestions to improve your user experience, please send your comments from the support page within the application. We will prioritize all suggestions and those retained will be implemented over the coming months.

Thank you for your patience. I hope you like the new design, tools and improved functionality.

Registering for the Free Version?

If so, you can join my Leader's Group and get access to RetireWare retirement planing software.

My Leader's Group is temporary and will be closed in the fall of 2013. Your account is set up so as to keep your information private and I cannot access it without your permission.

While we build our Leaders directory, you have the option of joining my (temporary) Leader's Group. You can decide later to join another Leader's Group or get the paid version.

If you would prefer not to be in my Leader's Group, send an email to You will then become an unattached user. You can use the retirement index tool and all other stand-alone calculators, but not the RetireWare retirement planning application. The application will only be available to those joining a Leader's Group.

Please note that I do not give financial and retirement planning advice, recommendations or anything to do with investing. I only provide direction on the use of the software.


Marc Des Rosiers, FSA, FCIA

The Longevity Risk

What is the longevity risk?

The longevity risk is the risk attached to the increasing life expectancy, which can eventually translate in needing higher than expected funds to meet expenses during retirement.

In other words, as you spend down your savings during retirement, if you live longer than expected you will run out of money. This means your last days could be spent in poverty or as a burden to relatives.

Getting lifetime income

In 1965, Jeanne Calment, a 90-year old French widow, sold her apartment to a lawyer under a contingency contract. The contract provided that he would pay her 2,500 Francs per month until her death, at which point the ownership of the apartment would be transferred to the lawyer. Unfortunately for the lawyer, Jeanne Calment turned out to be the world’s longest living human and survived for another 32 years.

The Canada Pension Plan and Old Age Security provide similar guarantees, but do not provide sufficient income for most. Those fortunate enough to accumulate long service in an employer-sponsored defined benefit pension plans get a lifetime guaranteed income, which together with Government pensions will typically generate sufficient income.

Getting guaranteed lifetime income is the key to eliminating the longevity risk. Without it, as one gets older and see savings dwindling down, the only strategy is to tighten the belt and conserve money until only Government pensions remain.  

We are living longer

The life expectancy at birth in Canada was 81.1 years in 2009. Life expectancy has increased by 6.2 years since 1979, when it was 74.9 years. Life expectancy has been steadily increasing and the trend is expected to continue. The upward trend in longevity is good news for all of us. Medical advances, reduction in smoking, exercise and a better diet are having a big impact on life expectancy. From a financial point of view, increased longevity puts a stress on individuals and Government. 

Women tend to have a lower mortality rate at every age. Life expectancy at birth in Canada in 2009 was 78.8 years for men and 83.3 years for women.

How long will I live?

A recent report from the Society of Actuaries (“2011 Risks and Process of Retirement Survey”) finds that more than half of retirees and pre-retirees misjudge their life expectancy and about 40% underestimate the figure by five or more years. Underestimating life expectancy means having too short a planning horizon. This can result in inadequate provision for retirement needs.
“Even when individuals or couples do make a reasonably good estimate of remaining lifetime for people their age, far too few of them provide adequately for the consequences of out­living average life expectancy.” – Society of Actuaries
Another shortcoming noted in the report is failing to fully understand the variability in life expectancy, and to understand that about half of the people will outlive the average life expectancy. Average life expectancy at age 65 is in the mid- to late 80s. For a 65 year old couple, there is a 50% chance that one will be living to age 91 and a 25% chance that one will be living to age 95.

At retirement, the steady stream of employment earnings that many of us relied upon stops and is replaced with withdrawals from assets accumulated to finance the rest of our lives. We face an uncertain future: we cannot know how long we will live or how healthy we will be. The first step is to ensure we don't underestimate our life expectancy when planning retirement.

Managing the longevity risk  

Running out of money is one of the primary concerns of most retirees. This is an even larger concern today as life expectancies have risen. Planning to live to a specified age is risky, and planning to live only to your life expectancy will be inadequate for about half of us.

There are three main approaches to creating lifetime retirement income:

  • Systematic withdrawals,
  • Annuities, and
  • Segregated funds that provide a guaranteed minimum lifetime benefit (GMWB).

Systematic withdrawals

Managing your retirement funds over a lifetime is a difficult balancing act. Being cautious and spending too little might needlessly restrict your lifestyle, and spending too much increases the chance of running out of money.

Managing the longevity risk means planning for a long period. Part of your assets should continue to be invested in equities, which have historically achieved higher returns, despite having higher volatility. The long-term horizon of your retirement – 20 or 30 years, means that you can ride out the ups and downs of the market by staying invested.

Poor returns in equity markets have set back retirement savings considerably and investors have responded by taking shelter away from equities to more conservative investments. Abandoning equities completely severely limits return potential and lower returns can seriously affect the amount and duration of retirement income.

Look at the odds of living longer than average and ensure you have the financial resources to meet your expenses for this entire period. If your resources are insufficient, scale back your retirement lifestyle as much as you can, especially in the early years.

With systematic withdrawals you are retaining the longevity risk. You can only mitigate its impact by scaling back withdrawals and achieving better investment returns. The advantage is that you keep control of your money and can leave a legacy.


The alternative of getting a life annuity eliminates the longevity risk altogether and provides an income stream for life. There are some disadvantages: losing control of your assets and the ability to leave money to heirs. Annuities can be expensive and provide an income that may not be sufficient to cover all expenses. This can make annuities slightly unpopular, but they should be considered as an important tool for retirement planning.

Instead of purchasing an annuity once, consider laddered purchases every few years. The income will be higher, and you will have a better idea of your longevity prospects. If you are healthy, the annuity rates will be higher, but you will keep control of a portion of your assets for a longer period of time. You can factor your desire to leave a legacy in deciding how much to allocate to an annuity.


Some insurance companies offer a "guaranteed minimum withdrawal benefit" (GMWB) option with their segregated funds. The GMWB provides an income for life, usually between 3% and 5% of the invested capital. The amount upon which the withdrawal rate is based is usually reset every few years, so if there is good investment returns, the income can grow (but will never decline).

These products have many complex rules (and terminology) and are sometimes difficult to understand. They also often “lock-in” the investor, who has to stay with the strategy or face penalties and losses if they cash out before the end of the term.

Many insurance companies have recently suspended sales of these products. Those who haven't suspended sales have reduced the lifetime income payout from 5% to 4% or even 3% to ensure their viability. The lower payout rates make these products less attractive at this time.

Which is best?

The solution may lie in a combination of these approaches. In any case, these three approaches of generating retirement income have different, sometimes opposite, features that involve trade-offs between flexibility and control in exchange for lifetime security.

There are some mathematical models that find the combination of these three products that minimizes the odds of running out of money while ensuring estate goals are met. When the models are used in a commercial context, we have to take the recommendations with a grain of salt: in the end, the objective is to sell product.

Not yet retired?

If you’re not yet retired, you can address the longevity risk by saving more, investing more aggressively, postponing retirement or planning for a lower standard of living for a longer period.
Saving more is paramount. Stash away as much as you can. Taking more risk with your investments may or may not work in the short term, but history has shown that well-diversified equities will outperform other asset classes over the long term.

Postponing retirement can be an attractive option to enhance retirement preparedness or recover from investment losses. Research has shown that the impact of delaying retirement from age 62 to age 66 can increase retirement income by 33%.

Postponing retirement reduces the odds of running out of retirement savings in several ways:

  • Additional savings accumulated,
  • Additional returns earned on savings,
  • Untouched capital that otherwise would be paid out as retirement income,
  • Increased value of other sources of retirement income such as Government and public pensions and employer-sponsored savings plans, and
  • Shortened post-retirement period.

Planning for a lower standard of living may be a last resort strategy, when all other options have been exhausted.

If unforeseen circumstances cause you to retire earlier than intended, consider working part-time or on a contractual basis during retirement.


We most likely will live longer than we think. Longevity is variable, and averages can mislead. One spouse will outlive the other and live for several years. Living long is expensive, but is an insurable risk with annuities. While other strategies reduce or mitigate the longevity risk, annuities take the risk away.

Longevity is a risk that I hope we will all have to deal with!

Tuesday, December 18, 2012

Life Expectancy

About life expectancy

Life expectancy is the expected (in the statistical sense) number of years of life remaining at a given age.
Life expectancy at birth during the time of the Roman Empire was about 28 years. At the beginning of the 20th century, global average life expectancy was just 31 years, and below 50 years in even the richest countries. Today, life expectancy in Canada and its peer countries is 81 years. This varies widely by region: humans live on average 32 years in Swaziland and 83 years in Japan.

Longevity is positively related to education and income. Longevity is increasing with medical advances and adoption of healthier lifestyles. In fact, life expectancy has increased by a full 10 years in the last 50 years.

The life expectancy at birth in Canada was 81.1 years in 2009. Life expectancy has increased by 6.2 years since 1979, when it was 74.9 years. The increase in life expectancy is expected to continue indefinitely.

Gender differences

Women tend to have a lower mortality rate at every age. Life expectancy at birth in Canada in 2009 was 78.8 years for men and 83.3 years for women. The gap between men and women has narrowed over time from 7.4 years in 1979 to just 4.5 years in 2009.

Average life expectancy at age 65 is in the mid- to late 80s. For a 65 year old couple, there is a 50% chance that one will be living to age 91 and a 25% chance that one will be living to age 95.

Regional differences

Canadians can expect to live three years longer than Americans. This gap has been increasing and this trend is expected to continue in the future.

Life expectancy also varies by region in Canada. While the average life expectancy at birth for the country as a whole was 81.1 in 2009, it ranged from a low of 75.1 years in the territories (Yukon, Northwest Territories and Nunavut) to a high of 81.7 in British Columbia. Three provinces beat the average: British Columbia, Ontario and Quebec.

Healthy life expectancy

The Healthy Life Years indicator (HLY) is a European indicator that measures population health. It combines mortality and morbidity data to represent overall population health in a single indicator. HLY measures the number of remaining years that a person of a certain age is expected to live without disability. In other words, it measures the disability-free life expectancy.

The chart below compares the proportion of a person's life spent in good health for various industrialized countries.

Health-adjusted life expectancy (HALE)

A similar concept related to HLY is the health-adjusted life expectancy (HALE). Life expectancy is sometimes criticized as putting too much emphasis on quantity of life, as opposed to quality of life.
HALE weighs years of life according to health status by subtracting from life expectancy average years of ill-health weighted for severity of health problems.

For example, in 2007 Canada's general life expectancy was 80.7 years, but of those years 73 could be expected to be healthy. So the average Canadian could expect to live about 90% of his or her life in good health.

Interestingly, although women have higher life expectancy than men, men have a higher HALE than women. For 2007, men were expected to spend 88% of their life in good health, compared to 85.8% for women.

The key point is that even if demographers expect HALE to increase in the future, our final years will be  spent with declining health and the associated personal and societal costs of care.

Maximum lifespan

Maximum lifespan refers to the maximum amount of time a member of a species can survive between birth and death. In other words, it is the upper boundary of life.

The oldest confirmed recorded age for any human is 122 years, a feat achieved by Jeanne Calment, a French widow who passed away in 1997. The maximum lifespan of a chimpanzee is 59 years. For a horse, it is 62 years. Here are a few species that have much longer maximum lifespans than us:

Galapagos tortoise150 years
Lobster170 years
Koi fish200 years
Red sea urchin200+ years
Bowhead whale211 years
Bristlecone pine1,000s of years
Jellyfish (Turritopsis nutricula)Immortal

Immortality is possible! The cells of hydras continually divide and this allows defects and toxins to be diluted. They do not undergo “senescence”, and, as such, are biologically immortal. Turritopsis nutricula is a small (5 millimeters) species of jellyfish that converts its cells (transdifferentiation).  This process can repeat indefinitely, also rendering it biologically immortal.

Leading causes of death

Alas, we do not possess the genetic qualities for living such a long time. How can we make the most of what we have? The answer seems to lie in what we eat and the amount of physical activity we do.

According to the U.S. National Vital Statistics Reports (Vol. 60, No. 4), the leading causes of death in 2010 were diseases of the heart and malignant neoplasm, each accounting to about 25% of deaths. Chronic lower respiratory diseases, cerebrovascular diseases and accidents accounted for about 5% each of the deaths. The rest was attributed to other causes, each amounting to a 2.5% or less.

"Uprooting the Leading Causes of Death" is an excellent – and entertaining – video by Dr. Michael Greger that offers practical advice on how best to feed ourselves to prevent, treat, and even reverse many of the top 15 causes of death.

Dr. Greger has a Website called, which disseminates nutrition-related research published in scientific journals in short, easy to understand video segments.

[Try our life expectancy calculator. You will get access to it with your free RetireWare account.]

[In addition to Statistics Canada, a lot of information and facts were based on “How Canada Performs” by The Conference Board of Canada at]

Thursday, December 13, 2012

Data Security


I'm a bit concerned about having personal data stored on-line. How accessible is that data to both Retireware employees and general public?


All data is encrypted when stored to the database and decrypted only at time of use by the RetireWare application.

So the database administrators, who have access to the database, would only see encrypted data fields and have no way of making sense of the data.

Similarly, while there are numerous security measures to prevent hackers from getting access to the database, should it ever occur, all they would get is encrypted data.

Data is stored using a powerful encryption algorithm that meets the Advanced Encryption Standard (AES), a specification for the encryption of electronic data established by the U.S. National Institute of Standards and Technology (NIST). AES has been adopted by the U.S. government and is now used worldwide.

The encryption algorithm we use is almost impossible to decrypt.

In any case, we will never access your data unless you give us permission to do so to handle a support request.

There is more information on our security page:

Monday, November 12, 2012

Income Tax


I have noticed that Retireware will calculate a decreasing amount of income tax payable annually.

What are the underlying assumptions for calculating income taxes? Does the program use current year income tax rates and income brackets, and then escalate the income brackets with inflation?


The program calculates income tax based on the current year rates, thresholds and deductibles, and assumes escalation of brackets even for provinces that do so on an ad hoc basis.

Variable Rates of Returns


Does the software have the capability to change projected rates of returns over the course of the calculation. For example, can you put in a return of 2% for say the first 3 years, then increase it to 3% for a few years and then 5% for the remainder?

Will it give me the maximum spending if I want to have 0 left at age 95?


The expected rates of returns are fixed, but you can set an asset mix that changes at retirement or an asset mix moves gradually to a more conservative portfolio over a set number of years.
So, yes the weighted rates of return can change over time, but using a structured approach based on the allocation of your assets to cash, fixed income and equities.

The program does not calculate maximum spending, but you can adjust your income goal and recalculate, until assets are exhausted or nearly exhausted at the desired age.

Please note that you cannot set your own expected rates of returns if you are using the free version.

CPP Not Showing


I have selected CPP and selected it as a source of income for my spouse and I and filled in all fields, but no CPP payments are reflected in the cash flow summary.


If you indicated that you are already retired in 'Financial Information', then you should also include for your spouse and yourself an annual income because the CPP needs this to calculate an estimate. The annual income will be used only for the CPP estimate.

Sunday, November 4, 2012

The Sequence of Returns Risk

When things don't go according to plan

The sequence of returns risk is the risk of incurring low or negative investment returns in the early years of retirement and the erosion of the asset base caused by withdrawals, making it is difficult to recover even if you have strong returns in the following years.

In other words, if you incur a couple of years of low or negative returns while taking withdrawals,
your ability to make up losses in future years even with strong investment returns is greatly diminished.

This is more acute with equities, which are more volatile than fixed income investments -- equities' higher expected returns come at the price of taking more risk. Investment returns from equities have greater variability, with large swings from one year to the next.

The following chart illustrates the volatility of returns of various asset classes.
The blue line represents annual returns on cash and money market investments over the last 20 years.
Returns are low and predictable. The red line shows annual returns for a bond portfolio. Less stable returns from year to year, but still fairly consistent.
The green line shows returns of the S&P/TSX Total Return Index, representing Canadian stocks. This green line zigzags wildly each year going from good to bad.

The returns in the above chart do not take into account fees and come from Canadian indices for cash, fixed income and equities.

If you're invested heavily in equities at the onset of retirement, timing is everything. If you're unlucky and start at a time when the green line goes south, your portfolio may never recover and you will run out of money faster than if you get decent investment returns.

Sequence without consequence

Consider these three possibilities of getting an average 7% return:

  • Level: 7% each year
  • Lucky: returns of -10%, 7%, 27.2% each year repeated every three years
  • Unlucky: returns of 27.2%, 7%, -10% each year repeated every three years

If you take no withdrawals, you'll end up with the same balance. The order in which you earn the return does not matter: you'll end up with the same amount of money.

This is good news during the accumulation phase in view of retirement. Years of negative returns will be made up with good years and you'll earn the average of the asset class you are investing.


Where sequence matters

When you take withdrawals sequence greatly matters. In our example, starting with $100,000 and taking $10,000 per year, the lucky order will let your assets last 21 years, while the level return will go for 17 years. However, the unlucky sequence will only last 14 years.


What you can do

Of course you can't know whether your retirement will start on a year with good investment returns. So these are a few strategies to consider in order to minimizing or avoiding the sequence of returns risk.

Reduce exposure to equities

While keeping some of your assets equities is essential to boost long-term returns, retirement is not the time to bet the farm. Having a significant portion of your funds invested in fixed income will damper the impact of an undesirable sequence of returns.

No equities

Having no equities will make the problem disappear, but creates another one: without the strong average returns of equities, you may not earn enough investment income to fund your retirement.

A moderate amount of risk is the trade-off required to earn these higher expected returns, while keeping the bulk of your assets in less volatile and risky assets, for example fixed income.

Invest conservatively and diversify

Lowering exposure to equities is a sensible approach, but you can also imnprove your odds on the equity portion of your portfolio by investing in companies that are not speculative. If you can't afford the consequences of bets that don't pan out, then you should stay away.

A diversified portfolio that closely follows the index will work best to take away company-specific risk, so your exposure is only to market risk.

Stay invested

If you suffer low or negative returns, stay invested. You can't throw the towel or know ahead of time what will happen next.

Time horizon

Look at your time horizon for the investment. If it's only a few years, equities may not be a good fit because you don't have time to make up losses. If it's for a longer term, such as 20 or more years, you'll live through a few bull and bear markets and earn the average return of that asset class.

Spend conservatively

Spend conservatively during the first few years of retirement and minimize your withdrawals. If you earn poor returns, low withdrawals will not deplete your assets as much and you'll be left with enough funds for the rest of your retirement.

Adapt spending

If you have a year with negative returns, take less for the following couple of years to help minimize losses and keep as much money invested to earn more investment income when markets recover.

Get an annuity

An annuity will not only eliminate the sequence of returns risk, but also the longevity risk. Consider annuitizing part or all of your assets. Partial annuitization works best if you plan to leave money to your estate.

Segregated fund with income

Some insurance companies offer a "guaranteed minimum withdrawal benefit" (GMWB), which is an option to provide an income for life, usually between 3% and 5% per year of the capital invested in the product.

The amount upon which the withdrawal rate is based is usually reset every few years, so if there are good investment returns, the income can grow (but never decline). You can read more about it at the end of this recent blog post.

Tuesday, October 2, 2012

More on Pensions

Questions and Answers:

1. I have a widow with a child receiving a CPP survivor's benefit of about $700 a month till retirement but I cannot find anywhere to enter this data.

Answer: if you want to include it in the spouse’s budget, enter it as 'Other Income' in 'Sources of Income'. You can put the current year for starting year, and the year it ends as the 'Ending Year'.

2. If client takes early pension with bridging, the system simply wants to know the annual amount of bridging to 65, not the amount of pension paid annually to 65. Correct?

Answer: Yes. If there are accruals make it a current defined benefit plan, if not, make it a 'prior defined benefit plan'.

3. Is there any way to show client is a widow? I am showing now as married but spouse with no income.

Answer: Just do a single calculation. In 'General Information' uncheck 'Do calculations for Both Spouses'.

7. I have a lot of 'non-registered' savings accruing in retirement due to excess income. Is there a way to project how much income will be generated from the assets rather than having all this surplus building up?

Answer: You must increase the retirement income objective in 'Retirement Income Target', otherwise, the excess is saved.

Tuesday, September 25, 2012

Receiving Tax-free Cash Flows


I'd like to know if there is a way to account for tax-free cash flows? (for example, an individual has agreed to lend a mortgage to someone. The capital payments that this individual recieves should be tax-free.)


You can enter up to four different years' worth in 'Other Assets'. If payments are monthly, multiply by twelve, then select a ca;endar year for each for 'Year Anticipated'. Also, be sure to select 'Other future assets' in 'Sources of Income'.

If there are more than four years of payments, then enter them as 'Additional Income' in 'Sources of Income'.

These amounts are taxed as income, so you could gross them up by a percentage such that the after-tax amount is roughly equivalent to the non-taxable payments.

Saturday, September 15, 2012

Monte Carlo Simulation and Withdrawal Amounts in Retirement


I have done extensive research on the Internet regarding using Monte Carlo simulators for retirement planning. From what I have read, it is more important to withdraw a fixed percentage (i.e 4%) of your total portfolio each year rather than a dollar amount. For example a $1 million porfolio you would withdraw 4% or $40,000 per year and let the rest grow.

My question is does your Monte Carlo simulation allow you to enter withdrawls amounts as a percentage of the portfolio as opposed to just a dollar amount. Some programs will event tell you how much you can withdraw at a given level of probability.

In other words, you have a 95% probability of not running out of money for xxx years if you withdraw xxx amount per year. How does your program deal with these issues.


With RetireWare, you build a plan by choosing a retirement income objective, and the income need is met using Government and company pensions, other income, and investment assets, each with their withdrawal rules and tax treatment. You run your plan on a deterministic basis (that is, assuming no variations in expected rates of return).

Withdrawals from invested assets depend on what you need to close the gap between the retirement income objective and income payable each particular year. This amount varies as some are indexed, others come in payment only from a certain age and some cease being paid at a particular point in the future (for example, if you work on a part-time basis for a few years after retirement).

The retirement plan that you create with all this level of detail is "stressed-test" using a Monte Carlo simulation, where the expected rate of return for each asset class varies randomly in accordance with its volatility. Monte Carlo is integrated with the actual plan and is not merely a flat withdrawal percentage each year. We have seen articles showing a safe withdrawal rate using Monte Carlo simulation as an analysis tool, but they usually used a simplified model. Our model takes into account various types of income and various types of investment accounts (non-registered, RRSP, locked-in assets, etc., each with their own withdrawal constraints).

You can try different retirement income objectives and see the probability of success for each. Then you can decide the income level you feel most comfortable with.

Friday, September 14, 2012

The 4% Solution in Retrospect

What would have happened if you retired 30 years ago?

In my previous post, we talked about safe withdrawal rates.

The withdrawal rate is a convenient approach that researchers use to determine how much a retiree can withdraw each year from a portfolio of assets and minimize the odds of running out of money (the "Probability of ruin").

Probability calculations are speculative: they are based on assumptions such as the expected annual return and volatility of the investments. Nevertheless, they are quite helpful for making decisions and evaluating options. They also may be the best approach to plan the future.

The magic period is often taken as 30 years to cover a typical retirement period, e.g. from age 65 to age 95. The withdrawal rate increases each year by the rate of inflation to maintain spending power constant.

In this post we ask: what would have happened if you retired 30 years ago?

The outcome

You recently got rid of your disco shirts and have $10,000 to invest on January 1, 1982. Will it be stocks or bonds?

If you invest in a diversified portfolio of stocks, you will have around $140,000. You will suffer anguish for a few years after the "dot com" bubble burst as your portfolio value turns south. After a steady recovery, your portfolio will suffer with the mortgage-backed security debacle. The stock market will have taken you for a roller coaster ride and you need resolve and discipline to ride out the rough times.

If you invest in a diversified portfolio of bonds, you will have almost $180,000 after 30 years. Most years your returns will be decent, sometimes disappointing, rarely spectacular, but you will have lost very little sleep ... and money.

Historical Returns Comparison -- Last 30 Years

In this illustration I made a few assumptions: equities earn the S&P/TSX Total Return Index. Fixed income returns are those of the DEX Universe Bond Total Return Index (and its predecessor the Scotia bond universe index). In both cases, there is no allowance for investment management fees.

In the calculations below, we'll adhere to these assumptions and also we'll use the actual rate of inflation to increase the annual withdrawal, not a fixed rate such as 2.5%.

The RetireWare Website has a free tool where you can compare returns over various historical periods and asset classes. You can try it here.

What happened in the past?

I will go a little longer than 30 years and look at historical returns since 1964, for the last 48 years. Here are a few interesting facts.

Range of returns

These are the range of returns that one could achieve by owning a portfolio closely matching their respective indices.

Fixed income
Average return
Lowest return
Highest return

Frequency of returns

Now let's look at the distribution of annual returns. The next table shows the number of years for various range of returns in the years between 1964 and 2011 inclusive.

Fixed income
Negative returns
Return between 0% and 10%
Return between 10% and 20%
Return above 20%
Years since 1964

A few observations:

  • Equities have earned about 2% more than fixed income. This is the risk premium. You take more risk, experience volatility and the higher returns makes it all worthwhile.
  • With 14 years of negative returns for equities, you need nerves of steel to stay the course and reap the years of big returns. If you got out of the market at one point, your performance could've ended up lower than bonds.
  • A 2% premium may not look like much but means there will be about 30% more money after 30 years.
  • The "bread and butter" return of fixed income is between 0% and 10%.
  • Equity returns revel with extremes: it is often all or nothing, not unlike ... the casino! 
  • Risk is real. With equities, if things go wrong your capital is at stake. Diversification will mitigate risk, but systemic risk will remain, such as an economic collapse, recession or depression.

As an aside, both historical return series (1964-2011) have almost no correlation. In other words, there is no pattern between bond and equity returns. They didn't tend to move together or away from each other. However, in the last 10 years, bond and equity returns have been negatively correlated. Negative correlation means that if one asset class does poorly, the other tends to do well. This is desirable as it dampers volatility and produces more stable rates of returns in a balanced portfolio.

Now what happens with withdrawals?

On January 1, 1965, would a 4% withdrawal rate do better with a portfolio of stocks or bonds?

With bonds your money would run out in about 25 years. Not bad. With stocks, your money would have lasted 48 years!

I tried retirement various starting years and it was hard to go bankrupt with stocks. Even starting in 1990, with a -14.9% return and assuming a 0% return for years after 2012, money would still last 47 years.

Should we invest all in a diversified portfolio of equities?

Well, unfortunately it didn't go like this all the time. If you retired on January 1, 1982, you would have done better with fixed income.

Allocation to
fixed income
Withdrawal rate that
lasted 30 Years

These are very high withdrawal rates. They are the result of a secular bull market and strong bond returns at the same time (and to a lesser extent ignoring investment fees). Of course, one needed to know the future to confidently withdraw such high amounts each year. But we can see that all asset allocations produced results that would work for even the highest spenders.

Recent times

What about recent experience? If I look at the last 10 years and repeat the sequence three times to form a thirty year series of returns, I will have more modest bond returns and more volatile stock returns.

This time, much lower withdrawal rates can be sustained.

to fixed income
Withdrawal rate that
lasted 30 Years

However, having 40% in stocks achieves the same result as 100% in stocks. 40% in stocks instead of 100% reduces the annual volatility of returns from 20% to less than 8%. Having a moderate portfolio with a lot of fixed income produces the same end result and is much more stable. It provides return-boosting exposure to equities and peace of mind at the same time.

What to make of this?

It is flawed to look at one or a few paths: they actually occured and will never come back. But in order to understand what can happen in the future, we have no choice but to look at the past.

The past has been full of unexpected events that impacted the economy and in turn affect capital markets, interest rates and inflation. The unexpected may very well continue to occur and our best tool to manage uncertainty is diversification.

If I was a betting man, I would say we will continue to see volatile equities and low yielding fixed income. I would also say that achieving a 4% withdrawal rate is a no brainer even in this environment.

Friday, September 7, 2012

Beta Release

Upcoming release dates

First, a sincere thank you to all who have expressed interest in our new product.

I think it is breaking new grounds and will help many Canadians prepare for retirement and monitor their finances using modeling tools that value design and sophistication.


Our beta release date of August 31 has come and gone. However, we are in the process of testing all aspects of the application and are very close to a release.

The plan is to start inviting users in the week following September 20. If all goes well, we will have a live date of October 20.

Maintaining full scope

Developing a new software product is a balancing act between project scope, cost and timeline. Many believe only two of these three constraints can ever be met.

Compromising on scope is not an option. Keeping development costs in check is paramount to maintain our price structure and free access to non-professional users.

This leaves timeline as a constraint that is harder to meet. Thanks for your patience.

In the pipeline

For those who registered, watch for an email shortly after September 20 with login access. We will seek your feedback and incorporate popular suggestions in the coming months.


Marc Des Rosiers, FSA, FCIA
Apeiron Software Limited

Tax Deductions for Investment Loans


Does your software take into consideration the tax deductibility of investment loans (i.e. do we have the option to make a loan deductible or non-deductible)?


No it does not. This is a refinement we plan to bring in the future.

Sunday, September 2, 2012

Government Pensions


Your calculations for the amount of Canada Pension and Old Age Security which I will receive increase dramatically over the years.

What is the basis for these annual increases? Is there any provision made for Claw-Back of Old Age Security Payments in years when total income is above the limit?


CPP and OAS increase annually by the rate of inflation you selected, unless you left the default value, which is 2.5%.

Clawback is applied in the calculations and is reflected in the income tax column of the results.

Saturday, July 21, 2012

The 4% Solution

The infamous withdrawal rate

A lot of research has been done in the last decade on determining a "safe" withdrawal rate.

Basically, how much can you take from a fund each year so that the odds of running out of money (the "Probability of ruin") is almost zero over the period of retirement, often taken as 30 years, that is from age 65 to age 95.

The withdrawal rate is not static. It increases each year by the rate of inflation, so your spending power remains the same throughout retirement. If you have $100,000, and the expected rate of inflation is 2.5%, the first year withdrawal is $4,000 in year 1, $4,100 in year 2, $4,202 in year 3, and so on.

There are a few ways to determine the "safe" withdrawal rate, but most often it is the withdrawal rate that has a probability of 95% or more of not running out of money over 30 years, based on assumptions as to the expected annual return and volatility of the investments.

Why invest in equities?

In order to make the numbers more compelling, it is often assumed that funds are invested in equities -- with their higher expected returns and higher volatility.

Investing in equities is wise for the long-term, but with higher returns come higher risk and more chance of failure. Unless you withdraw such a small amount that any adverse investment outcomes will not wipe out your assets. And this is the idea behind the 4% withdrawal rate.

While taking low withdrawals minimizes your risk, it also can be a lost opportunity to enjoy the fruits of your savings. If you leave most or all of your capital untouched at a ripe old age, your inheritors will be grateful, but you could have ticked many more items off your bucket list.

How about bonds?

Is it possible to withdraw more than 4% without taking less risk and have a near zero odds of running out of money?

Consider the following. What would happen if I invested all my money in a bond exchange-traded fund (ETF) such as the iShares DEX Universe Bond Index?

First I can get some appreciation over time, as it did in the last few years, but let's ignore this for now. This ETF (and comparable funds offered by other suppliers) pay monthly dividends. The yield at the date of writing is 4.95%. It has hovered in this area for the last several years.

If I take a 4% withdrawal rate at age 65, earn no appreciation but get a 4.95% yield, I will run out of money after 40 years, at age 105!

Let's look at other possibilities

Withdrawal rate
Years after which money runs out

If I take a 6% withdrawal rate at age 65, but earn a modest (and historically occurring) appreciation of 1% plus my 4.95% yield, I will run out of money after 27 years at age 92.


Here are a few other shortcomings with most safe withdrawal analyses.

They ignore income tax: in real life investment income and withdrawals from registered funds are taxable. What counts is how much after-tax is left for spending. Without a model for income tax, the withdrawal rate is just a number.

Withdrawals also come from various types of accounts: non-registered funds, RRSP, locked-in funds and tax-free savings account (TFSA). Each type of account has its own withdrawal constraints and income tax treatment.

In addition, our needs vary over time: we need more in some years, for example if we don't yet collect Government pensions, and less in others, if we earn income during retirement.
Our needs vary also for each period of retirement: the active, the sedentary period and end of retirement.

Last, withdrawal order from the various types of account is also ignored. It has a significant impact that cannot be ignored.

A few words about GMWB

A segregated fund is a mutual fund packaged with an insurance contract that provides a guaranteed return and a death benefit.

Some insurance companies offer a "guaranteed minimum withdrawal benefit" (GMWB), which is an option to provide an income for life, usually between 3% and 5% of the initial capital. The amount upon which the withdrawal rate is based is usually reset every few years, so if there is good investment returns, the income can grow (but never decline).

The income for life provided falls within the range of easily achievable withdrawal rates, considering the GMWB withdrawal are not increasing unless the investment experience is good enough to cause a reset. Nevertheless, several insurance companies have thrown the towel and suspended sales of these products in the last few months. Those who haven't suspended sales have reduced the lifetime income payout from 5% to 4% or even 3%.

The insurers blame the suspension or benefit reduction on the low interest environment.  There is also another cause: despite high fees, increased capital requirements and volatile capital markets made these products unprofitable for the insurers. For the consumer, the value proposition is not nearly as attractive as it once was.

Course correction

I have a few conclusions to draw from my arguments.

  • Make the early withdrawals reasonable if you have significant exposure to equities to minimize your sequence of returns risk.
  • If you decide to take higher withdrawals, monitor your rates of return and take corrective action by taking smaller withdrawals for a few years after a year or two of bad returns.
  • Use this analysis in your decision to purchase an annuity or segregated fund that provides a guaranteed minimum withdrawal benefit (GMWB). What withdrawal rate does the annuity or GMWB provide?

Last words

The mathematics behind the safe withdrawal rates is clever and sound. But perhaps there is a (small) elephant in the room: money can stretch further with less risk and little effort.

Am I suggesting following the above strategy: it is your decision. I am mostly using the above as a counter-example to disprove the conventional wisdom of the 4% withdrawal rule.

Saturday, July 14, 2012

Going for the Long Haul

Withdrawal order

Life is not a sprint, it's a marathon. So you must pace yourself and spend just the right amount during retirement in order not to run out of money.

This is where more saving, more investing, and less spending will improve your odds. Your withdrawal strategy can also help stretch out your savings.

Here are a few ideas on planning your retirement income.

There are a few schools of thoughts, but I am a fan of withdrawing money in the following order:

  1. Taxable account (non-registered investments)
  2. Tax-free savings account (TFSA)
  3. Locked-in Retirement Account (LIRA)
  4. Registered retirement savings plan (RRSP)

Essentially, the strategy is to take money first from accounts where the withdrawals are non-taxable or minimally taxed withdrawals.

The idea is to that investment income from a non-registered account is taxable, so your net after-tax rate of return is lower than the tax-free rate of return from a registered account. Since investment income compounds over time, you achieve greater compounding with higher returns and it makes a big difference over time.

Registered funds enjoy tax-free growth but are taxed as income when withdrawn. You can withdraw just enough to meet your needs and minimize taxable withdrawals. These taxable withdrawals will be partially offset with age and pension income deductions, and possibly higher medical expenses deductions.

Your RRSP has to be converted into a registered retirement income fund (RRIF) by the end for the year during which you turn age 71. A minimum withdrawal must be taken each year from a RRIF, based on age-related factors. Similarly, if you have a LIRA, it has to be converted into a life income fund (LIF) at the same time. Depending on the provincial jurisdiction for the LIF, withdrawals will be typically limited to the RRIF's age-related minimum, but may not exceed a maximum amount as well.

So you have to take the minimum RRIF withdrawals to avoid penalties. It is a good idea to take the maximum LIF withdrawals, and save any excess not required for your budget. This will speed up access to locked-in money, so it will be there when you need it. You can invest the funds in a tax-effective manner to defer tax on investment income on these newly released funds.

If you have large unrealized capital gains from a taxable account, the deferral of taxation in such cases is Going for the long haulsimilar to the registered account, so the benefit of withdrawing from non-registered first may not matter as much.

Stretching money a few more years

Here's an example to illustrate my point.

Suppose you have $200,000, half in a registered retirement income fund (RRIF) and the other half in a non-registered account.

You want to receive 4% of your assets after-tax each year. So you'll need to take 5% from the registered account to get 4% after-tax based on the assumptions below.

Here are the assumptions:

  • Investment return: 5%
  • Tax rate on investment income from non-registered account: 40%
  • Tax rate on withdrawals from RRIF account: 25%
  • Non-registered investment income fully realized each year

The chart below shows the outcome if you withdraw all your registered assets first and then dip in your non-registered assets.

You run out of money in 2037.

The second chart shows the outcome of withdrawing all non-registered assets first and then using registered assets. In that case, money runs out in 2040.

All other things being equal, what happens when you use non-registered assets first?

You get leverage from compounding tax-free investment returns as opposed to the lower compounding of after-tax investment returns.

And this will make your money last an extra three years in our example.

TFSA or RRSP first?

I tend to favour withdrawing funds earmarked for retirement in a TFSA before going to the RRSP or LIRA.
The TFSA is a flexible vehicle, but you need contribution room to take advantage of the flexibility. You create more room as withdrawals from a TFSA restore contribution room.

So in years you actually have to withdraw more than you need from a RRIF because of the minimum annual withdrawal, you can at least deposit some or all the funds in the TFSA to continue earning tax-free investment income on the excess money.

Also, as most of your assets will be concentrated in an RRSP or LIRA, the more you defer, the more compounding you earn when you minimize withdrawals and have all your money invested.

TFSA at a Glance

Here's a quick overview of how the TFSA works.

  • Starting in 2009, Canadians age 18 and older can save up to $5,000 every year in a TFSA.
  • TFSA contributions are not deductible.
  • Contributions to a TFSA are not deductible for income tax purposes but investment income earned in a TFSA (including interest, dividends and capital gains) will not be taxed, even when withdrawn.
  • You can withdraw funds from the TFSA at any time for any purpose.
  • Unused TFSA contribution room can be carried forward to future years.
  • The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.
  • Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits (such as the Old Age Security, Guaranteed Income Supplement and the Canada Child Tax Benefit) and credits (e.g. age credit and GST credit).
  • Contributions to a spouse’s TFSA are allowed and TFSA assets can be transferred to a spouse upon death.
  • Maximum TFSA contributions increase each year in line with the inflation rate, to the nearest $500.
  • TFSA contributions are independent of (and in addition to) RRSP contribution limits.

Use of TFSA

One last comment on the TFSA. It's a great vehicle to hold funds for emergency. You can invest in low risk fixed income and pay no income tax on investment income.

This provides you with a better return and more impact from compounding.

Depending on how much you need for emergencies, any excess can serve as a source of retirement income.

Deciding where to withdraw first

Your circumstances may call for a different strategy than what is suggested here.

But knowing the characteristics and capital available in each type of account, you can start planning for the withdrawals each year in the future.

Friday, July 13, 2012

CPP Pension


I am having difficulty getting RetireWare to show my expected CPP pension income. I am currently semi-retired, age 56. I have no full-time employment earnings and have checked 'Already retired' in Financial Information. Nor am I currently in receipt of any CPP pension, so I can't enter any in Government Pensions.

Is there any other place I should enter my expected CPP income so that the program will recognize it?


If you are semi-retired, select 'Already Retired' in Financial Information as you did, but enter an amount for the earnings. This amount will be used to estimate the CPP.

If you are working part-time, you should enter the part-time income in 'Sources of Income'.

Friday, July 6, 2012

Will I have enough?

The days of being sent off in the sunset with a gold watch, a pension and health insurance for life are gone forever I'm afraid.

We now have to rely on our own savings, the Canada (or Quebec) Pension Plan and Old Age Security. Only a lucky few get an employer-sponsored pension. These savings have to last longer because we are living longer.

The good news is that over your lifetime of accumulating - and withdrawing money - most of the funds will come from investment income, not capital. This is because of the miracle of compounding: not only your capital earns investment income, but investment income continually increases the amount invested that can potentially earn income.

If you are within ten years of retirement there are a few things you need to do to make sure you'll have enough.

Compare your income with your expenses during retirement and see if they match up. Few people will have exactly the amount of money they will need in retirement. Most will have a shortfall. If this is your situation, there are a few ways to close the gap and make your savings go further.

Where will you find additional savings? Here are some suggestions for active workers.

1. Maximize contributions

Make the maximum contribution to your workplace savings plan through payroll deductions. Contribute the maximum to your RRSP. If you have a savings plan with your employer with matching employer contributions, contribute enough to get the maximum matching amount.

Your contributions to an RRSP or defined contribution pension plan earn tax-free investment income and they are fully tax-deductible.

2. Retire at a later age

Staying employed as long as possible has several advantages.

Having an income gives your retirement savings more time to grow. Employment income also means continued savings for a few more years. Your employer also provides life insurance, dental and health benefits, so you don't have to cover these expenses as long as you work.

As well, there is a social benefit to working that is often as important as the income you can draw from your employment.

3. Decide on the best time to start receiving pension income

The amount of monthly CPP will be highest the older you are when you start receiving it. At age 62, your CPP will be reduced by 18%. At age 68 it will be increased by 21%.

If you participate in a defined benefit pension plan, you will have to decide as well on the pension commencement date. Try to meet the conditions for an unreduced pension. If you can't meet the eligibility criteria, try to you minimize the early retirement reduction to your pension by starting it as late as possible.

If you have a spouse, select a pension option that provides for a survivor benefit for your spouse, even though your monthly benefit will be reduced.

If you need the money immediately, you have no choice but to take it. But is you can wait, the increases after age 65 are greater than the reductions before 65.

There is no hard and fast rule. Early retirement will give you a smaller pension but it will be payable over a longer period, while taking it at age 65 or later will give you a higher pension payable a shorter expected period.

4. Control your expenses

You can downsize or relocate so your living costs are in line with what you can afford.

However, the years before retirement are the worst time to take on large debts, such as a home equity loan. And this includes loans to your children. Your retirement money must be left untouched and serve only your retirement needs.

If you run out of money, you will have to ask others to bear the financial burden for your care later on.

Large purchases are also unwise such as a new car or vacation home if you need to save.

5. Invest wisely

Get knowledgeable about investing or get a professional to do this for you.

Your must take on just enough risk to earn a decent return while staying comfortable with your investment strategy. Savings accounts and money market funds earn less than the rate of inflation. So you are essentially losing money with these ultra safe investments.

In the next post, we will look at planning income and withdrawals, in particular when to draw income and what type of account should be accessed first.

Updating Date of Calculation


1. When I load my old file, which worked fine before, it says my retirement date is befoe the minimum date allowed? I picked same date from the calendar and got same message?

2. My Date of Financial Information also gives the same out-of-range message. I tried the calendar to pick the date and got the same message again.

3. When I run the calculation without changes to my data file it does not show any CPP income just OAS?


1. It's because the program looks in the future. I know it may be an annoying feature, but the illustration starts from today and goes forward. Note that a date of retirement before the date of calculations is accepted.

2. Use today's date or a later date.

3. Even though you are retired, enter a value for income in Financial Information. By selecting 'Already retired' the program will calculate an estimate for the CPP based on your earnings level.

The CPP needs earnings to calculate an estimate unless you enter a monthly amount already in the course of payment.

Saturday, June 30, 2012

Maximum RRSP contributions


The program does not seem to increase RRSP contribution to the maximum allowed in coming years, even though the Government has announced increased limits.


The RRSP maximum annual contributions for future years are in the program.

You need two conditions to hit the annual maximum: high income and high annual savings. If both of these are met, then the maximum will apply.

In order to see RRSP contributions during the first year of your plan, ensure you put the applicable amount for the current year RRSP deduction limit on the 'RRSP Deductions' tab of 'Registered Investments'.

Retirement Income Objective


I have inserted a retirement expense objective of $33K. The client is 63 years old and retired with only an RRSP portfolio to draw from.

For some reason, in the first year only, the objective is doubled to $66K and thus there is a large withdrawal from the registered portfolio.

How do I fix this issue?


The first year of retirement may be only for a few months. So the objective would reflect employment income up to the month of retirement, and a portion of the $33,000 for the month remaining in the year. Also, when the retirement year is in the future, the objective of $33,000 is in terms of "today's dollars", which means it will be indexed between the current and retirement year.

Planning Your Life

You want to live a long and fulfilling retirement? You'll need sufficient funds to do all you want to do for the early years, and pay for medical care not covered by provincial health insurance in the later years.

If you still have a number of years before you plan to retire, you should evaluate where you are with your retirement savings and set the financial goals you need to meet to afford to retire comfortably.

But the first step for planning the rest of your life is knowing where you are today.

An inventory of your money

Many people don’t have a clear idea of how much money they actually have. Finding out how much you can have for retirement starts with adding up the value of all your current assets.

Assets are cash, investments, such as RRSPs, locked-in accounts and investment accounts. Also include the value of real estate property such as your home and cottage. Other assets include the cash value of life insurance.

Then include your liabilities such as mortgage balance, line of credit and loans. Get accurate numbers by referring to account statements. If you can't locate a recent statement, contact the financial institution or access your account online. The bank holding the mortgage can provide the amount of your mortgage balance. Be realistic about how much of your home equity might be worth.

Count only money earmarked for retirement. You should exclude emergency funds and money set aside for your children's education.

Knowing how much you have today, you can now estimate how much you can expect to have at retirement.

Diversify your investment and spread your risk

With your money inventory at hand, determine your asset allocation by adding the current value of each type of investments in basic categories. Here are common asset classes for Canadians:

  • Cash, GICs, money markets
  • Bonds and fixed income investments and funds
  • Canadian stocks and mutual funds
  • U.S. stocks and mutual funds
  • International stocks and mutual funds.

Compare the current allocation of your assets to the investor profile that matches your risk tolerance and the time horizon of your investments. If you don't know, complete an investor profile questionnaire from a reputable Website (including this site).

You can expect different rates of return to apply to each of the different types of savings.
This is why you asset allocation decisions are so important. Higher expected returns mean more risk and more volatility. More risk means a greater chance of achieving low or negative investment returns.

Your risk of loss is reduced by investing in a variety of asset classes and individual investments. The ultimate diversification strategy for equities is an index fund, which is a fund that invests in the same securities and in the same proportion as the stocks of a market index, such as the TSX Composite.

On the other hand, inadequate diversification by having too much money in one or a few types of investment is rarely a good idea. One bad outcome can devastate your portfolio.

How much you'll need for each phase of retirement

All the money we are trying to save up is for one purpose: having sufficient funds to stop working and living off our assets. You can expect that you and your spouse's retirement will last a long time. The longer you have to plan for, the more uncertainty there is.

If you figure out what it takes, you can then start figuring out how to get there. You need to determine what will be your expenses during retirement. Your expenses will change over time because of inflation and because of life pattern.

Early on, you'll spend more on traveling, hobbies, and lifetime dreams. As you age, it is likely that more of your budget will go toward medical expenses.

Start with day one for your retirement budget.

You can think of retirement consisting of three periods. The first part is the active period: travel, sports, hobbies, and the good life. This could be between age 65 and 75.

The second period is the sedentary period: less travel, more time around the house and around town. This would typically be between age 75 and 85. If you're reasonably healthy, your expenses will actually go down.

In the third period you will need more services, particularly for assisted living and health care expenses. Expenses will typically be higher during this time.

You don't know exactly how and when you will go from the first to the second to the third period, but it is reasonable to assign 10 years for each period as a starting point.

The variation in the expenses for each period depends on the difference in the lifestyle you're hoping to live.

Another aspect to consider is the split between essential and discretionary expenses, and the expenses
you need to cover as a couple and if only one spouse is alive.

Inflation is a major factor in determining how much money you will need in retirement since even a modest inflation rate adds up to a big difference over time. Medical costs have risen faster than inflation over the last 20 years, and this trend is expected to continue indefinitely. Provincial health care does not cover everything. For most, drugs and many hospital services, including long-term care must come out of our own pocket.

Do not forget about vision and dental care, which are not covered and will be a continued expense for the rest of your life.

Where and how will you live?

Your future housing needs must be a top priority. You must have an idea of how this will play out, because expenses related to housing is an important component of the budget. If your mortgage is paid off, you still have to pay for heating, utilities, property tax, and maintenance and repairs.
Eventually, your house will no longer be adequate: too many rooms, too many stairs and too much maintenance. You will have to consider other types of housing. Retirement living facilities, designed for reasonably healthy older people, often commands high rental costs. Where more assistance is required, costs can be prohibitive.

This is where long-term care insurance can make sense. It can protect your assets by paying for medical care in a nursing home

Premiums vary by the features you choose, such as the amount of daily benefit paid and inflation protection. If you're considering a policy, get advice from a professional, because long-term care insurance is complex and each product is different in their coverage.

Friday, June 22, 2012

Five More Retirement Planning Pitfalls!

Looking to improve our odds

Last time, we looked at five major retirement planning pitfalls and pointed out ways to improve odds of achieving financial security.

We complete our list with five more in this post.

6. Early death of a spouse

There are two cases to plan for: you die first and your spouse dies before you. Thinking that that the typically older male will pass away before a younger female spouse is only one possible scenario.

You have to look at the consequences of the early death for each spouse. How will be each do, considering the many years the survivor may live?

If the surviving spouse's budget reduces substantially,  with the combined assets remaining untouched, then it will have little effect on financial security.

A decrease in income from reduced survivor pensions or lifetime pensions ceasing at death may require a reduction in expenses.

Here are a few ways to protect each other:

  • Estimate what expenses will decrease after death, such as food costs. As a rue of thumb, the surviving spouse may be able to maintain her standard of living on about 80% of what was required when both were alive.
  • Ensure each spouse has the appropriate type and amount of life insurance. You can set up a policy to pay the face amount on either, the first, or the last death.
  • Select a "joint and last survivor" pension option if you have a defined benefit pension plan with your employer.
  • Consider purchasing a joint annuity with a portion of your retirement savings.
  • Determine which income sources will be lost or reduced (such as CPP) when a spouse dies, and how any shortfall can be met going forward if required.

7. Long-term care

This is a topic we don't like to think about.

We tend to think we'll never need long-term care (LTC). Few can afford to self-insure and fewer buy long-term care insurance coverage.

A few things to consider when planning for this possibility:

  • LTC insurance is quickly evolving, so keep abreast of what is available, review coverage and premiums of each carrier.
  • Premiums increase rapidly with age, so consider it as soon as possible while premiums are still affordable.
  • Think of the financial impact for your spouse and for your estate goals if you do require long-term care.
  • Review what your provincial health care covers in these situations, and whether the level and quality of care is sufficient for your needs.

8. Saying no to annuities

We just love receiving a cheque each month for life.

However in practice, few set up their retirement to eliminate the possibility of running out of money.

In essence, we are trying to self-insure against long life and this is very difficult to do.

Having lifetime income that doesn’t depend on the vagaries of the capital markets greatly reduces the chance of having to reduce your standard of living in retirement.

Consider investing part or all of your savings in an annuity. If your sources of lifetime income (Government plus annuity) cover your essential expenses, you've eliminated the financial consequences of living longer than you ever thought.

Remember that as interest rates go up, annuity premiums go down. This is because premiums are determined based on funds earning fixed income rates of return.

Here are a few ideas to deal with the (desirable) prospect of living a long life:

  • Work as long as you can, even on a part-time or contractual basis to reduce the period of time you'll need to rely solely on retirement savings.
  • If you have a defined benefit pension plan, do not take a lump sum option when retiring or leaving your employment; only consider it if you are a long way from retirement.
  • If you have a defined contribution pension plan or group RRSP, consider using these funds to purchase an annuity when you reach your retirement age.
  • Ensure you have enough guaranteed income to meet your budget for essential expenses.
  • Get professional advice to decide how to allocate your assets between portfolio investments and an annuity.
  • If you have a spouse, consider a joint and last survivor annuity, so both of you can benefit from the lifetime income it provides.
  • Consider staggering your annuity purchases over time to take advantage of lower premiums as you become older, and reduced premiums if interest rates rise.
  • Determine the amount and payment terms for you and your spouse for each source of retirement savings. This includes CPP, OAS, a defined benefit pension and annuities.

9. Lack of Investing Knowledge

In the last 20 years, there has been a shift in responsibility from Government and corporations to the individual for covering financial needs for retirement. We need to save over our working career and manage our invested funds.

And this requires that we increase our knowledge in this area in order to earn decent returns and avoid common pitfalls.

Here are ways to address our shortcomings in this area:

  • Get a solid understanding of financial products (stocks, bonds, mutual and segregated funds, etc.)
  • Review your asset allocation and rebalance regularly in order to be in line with your target asset mix.
  • Do not listen to forecasters, prophets of doom or irrational optimists. The future is unknown and will unfold differently than their predictions. If they get it right time, it’s more than likely because of luck.
  • Do not attempt to time the market and don't sell when times get tough. You will be missing out when markets rebound.
  • Consider investing in target date funds, which automatically shift the asset allocation to a more conservative portfolio as you get closer to retirement.
  • Invest tax-effectively: it's the after-tax return that counts. Put fixed income investments in your RRSP and equities in a taxable account.
  • Your target asset allocation should be measured against all your assets: registered and non-registered.
  • Seek professional advice if you can't handle your investments.
  • Invest in accordance to your risk tolerance. Do not take more risk than needed.
  • If you'll have more than enough money, you don't have to take undue risk.

10. Getting Poor Advice

It's okay to discuss with friends, family and co-workers who are not financial professionals, but do take any advice from them with caution.

Consider the following when it comes to receiving advice:

  • Get your information from reliable sources: online and offline.
  • A financial professional can assist you to sort out your retirement planning issues and help you formulate your goals and plan to meet them.
  • Ask financial professionals for their credentials, in particular their retirement planning expertise.
  • Ask how your financial professional is compensated, in particular whether compensation varies based on the product you are investing.

We touched briefly on approaches to deal with some of the most important post-retirement risks: longevity, inflation, untimely death of a spouse and long-term care. We will expand on each of these in future posts.

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Founded in 1994, Equisoft offers advanced digital business solutions to its clients in the insurance and wealth management industries to support their growth. The firm develops and markets innovative front-end applications (InsuranceElements and WealthElements) featuring industry-leading user interfaces and state-of-the-art technology.

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