Friday, May 25, 2012

Pre-Retirement Risks

Pre-retirement Risks or What Can Derail a Retirement Plan
“There is always risk in the stock and bond markets. Risk is the source of returns. The greater the risk, the higher the expected return.”

Dan Solin, A Rational Response to Irrational Market Anxiety
I will discuss today the many hazards that can occur before we hang our hat and decide to retire.

Honey I’m retired

For many of us, retirement does not start the day after our retirement party. We gradually reduce the work portion of our life and replace it with more of the leisure portion. We may leave our last nine to five job and start our own business, working part-time or on a contractual basis. The next thing you realize is that you actually have started your retirement. This situation provides a nice transition, but has to be managed with solid planning.

The more common situation is a loss of employment, or reduced employment, and the unpredictable nature of it is harder to manage. How can we prepare for this? We need to bridge the period between this forced retirement and the actual planned retirement age.

We need to ensure we won’t suffer devastating investment losses by investing more conservatively. We also can plan our income and expenses for the next few years and determine how we can meet our budget with severance, early retirement company pensions, Canada (or Québec) Pension Plan and whether we can find part-time or contractual work.

If income is insufficient and expenses cannot be reduced further, we can look into updating our skills to areas that are more in demand. If this is not possible, then we may need to start drawing from invested assets. In years of low or no income, it may make sense to withdraw from an RRSP, as the tax on these withdrawals will be minimized.

The date choosing you

There are two other circumstances that can give rise to a forced retirement: health issues and disability. Declining health prevents us from working among other activities and is expensive with the cost of care and drugs. The cost side can be managed with personal health insurance, but the loss of income has to be compensated by a reduction of expenses and withdrawal from invested assets.

Disability is also a health issue, but it can be managed with disability insurance. Workplace benefits always include a long-term disability plan and you should purchase it. If not available, personal disability insurance may be an option, although premiums for individuals are higher.

Savings setback

Over the long-term, equity markets have historically delivered solid returns, and we can cautiously expect this to continue. In theory, we take more risk to achieve greater returns. Equity and bond markets are volatile, that is, returns are not stable. So we may – and do – experience regularly a few bad years in a row, followed by good or spectacular returns.

A few years of bad returns may occur at exactly the wrong time: just before retirement. For example, if your investments dip by 20%, then you probably should cut back withdrawals during retirement by 20%.

In the last few years, segregated funds with a guaranteed minimum withdrawal benefit (GMWB) sold by insurance companies have been quite popular. In exchange for higher fees, a guaranteed minimum income of 5% of assets is payable for life. This provides a safety net against devastating market losses. Two comments on GMWB: if you stay invested for the long-term and ride out negative years, the guarantees will not likely come in play. Also, several insurers have exited this market, because of lack of profitability and heavy capital requirements. Nevertheless, where available, they do provide protection and may have a role in your retirement product allocation.

How do we deal with this?

First, we have to gradually move to a more conservative portfolio. This concept is embraced by “target date funds”, but beware of the wide range of equities at the retirement stage between funds. In any case, lowering equities will reduce volatility and expected returns. But we can achieve more stable returns and reduce or eliminate the possibility of a devastating loss.

The years just before and following your retirement date are no time to gamble.

Save more

If you do experience negative investment returns, you can tighten your belt and save more. This will be easier if you can control your expenses and eliminate unnecessary spending.

Stay invested in the markets

Throwing the towel and getting completely out the markets will prevent you from earning good returns when the bull market comes back.


Diversifying investments among asset classes is a good idea, but is less effective in down markets because all equity markets tend to become highly correlated. But a well-diversified portfolio will reduce the overall volatility of your investments. 

Plan what you’ll need

Plan what you’ll need for retirement so you know what you need and what it takes to get to you goal. You can make a post-retirement budget and find the right balance between what you wish and what can be realistically achieved.

Work more

If you can, find other part-time contractual work to complement your income and send this money directly to savings.


If you are eligible to receive a pension from the Canada (or Québec) Pension Plan or a employer-sponsored defined benefit pension plan, consider deferring commencement to the time you get an unreduced pension. Early retirement reductions can be significant working a couple more years lets you earn income and save for retirement and enjoy a full pension when you retire.

“Safe as Houses”

For many, a lot of our net worth is tied to the value of our house. It make sense when children are gone to move to a smaller house or apartment and free up the leftover capital as a source of retirement income. If you get less than expected, this may affect your future standard of living. You may need to be flexible and adjust your expectations or wait for a recovery. Bear in mind the seasonal nature f real estate sales, with the spring being more often a seller’s market.

Throwing a monkey wrench

When all is well and working according to plan, Murphy’s Law rears its ugly head: if anything can go wrong, something will go wrong sooner or later.

Unforeseen expenses such as major renovations or medical issues can be quite costly. There is also the possibility of having to take care of family members in need: aging parents requiring assistance and children, and the time and expense associated with this.

The best way to deal with this is to keep an emergency fund, held in liquid investments to cover the eventualities that could apply to you.

Sad notes

Planning retirement involves both spouses of a couple, even if one retires before the other. If a change occurs in marital status, then the plan has to be redrawn based on each spouse going forward with its share of the family assets. Being single again means that a lot of expenses previously shared will have to be assumed by each, such as housing, car, vacations, etc.

Here’s my second sad topic: death of your spouse. Having the right amount of life insurance is essential to ensure that neither suffers a financial setback on top of a devastating loss.

If one or both is uninsurable, then having a will that minimizes income tax will maximize the assets available to the other spouse. At this point, a change in housing to a less expensive dwellings and investing the difference for future retirement income makes sense.  

Young retirees need more

One last thing, the younger you retire, the more money you’ll need. Retiring early needs careful planning: you have to know how long your money will go and how your sources of retirement income and assets will fit together to meet your retirement budget over the long term.

How is Income Tax Taken Into Account?


I am a little confused on how the software "simulates a tax return". How does this work?


The software simulates a tax return, so for each future year of the illustration of assets and future income, income tax calculations are based on actual tax rules.

Other products usually use a single "marginal tax rate" for simplicity. By using accurate tax calculations, the numbers are more robust and reliable.

Friday, May 18, 2012

An Inventory of Post-retirement Risks

Looking for a good list

The Society of Actuaries has done a lot of work in recent years exploring post-retirement risks. Among their many excellent publications is “Managing Post-Retirement Risks – A Guide to Retirement Planning”. In there you will find a shopping list of risks providing for each some background information, an assessment of predictability and risk management approaches.

You will find this and many other interesting publciations on the Society of Actuaries Website:

Post-Retirement Needs and Risks

Our list has many in common with the SOA list, plus a few others that I feel are important and need their own consideration. For completeness, I didn’t drop any from the SOA list, although some may not be relevant for most.

Having a list is a good starting point for our risk management methodology. We can then prioritize each risk, quantify its likelihood and evaluate the consequences as they apply to our own situation.

Risks defined

So let’s go through our inventory of risks.

Longevity risk

"Longevity: The Underlying Driver of Retirement Risk" – Society of Actuaries

This is the risk you want to incur!

Longevity risk is the risk that retirement assets eventually become insufficient to provide the income we need to pay expenses for as long as we live.

All other risks exist because of the longevity risk. Stock market, sequence of returns and interest rate risks don’t matter if longevity wasn’t the goal. We need better returns to have enough money for the long haul and in the process become exposed to uncertain and volatile equity returns or fixed investments returns that fall below expectations.

Interest rate risk

The risk of low earnings or reduced market value of a portfolio due to low future interest rates.

Sequence of returns risk

The risk that just before or after retirement a market downturn will reduce the capital base, not leaving enough time to recover losses when income is being drawn. This means the portfolio runs out of money much sooner than if there had been no market downturn.

This combination of poor or negative returns with account withdrawals at the onset of retirement can rapidly deplete a portfolio, leaving insufficient funds invested to make up losses in future years.

Stock Market risk

The risk of the decrease in the market value of an investment.

Inflation risk

The risk of loss of purchasing power due to the increase in costs over time due to rising prices.

Loss of spouse risk

The risk of adverse financial consequences caused by the death of a spouse.

Declining health risk

The risk of increased need for assisted care because of declining health in old age.

Medical costs risk

The risk of increased medical-related expenses in old age.

Employment risk

The risk of loss of supplemental income by working part-time or full-time while retired.

Unforeseen expenses risk    

The risk of the adverse financial consequences of unforeseen expenses.

Estate preservation risk

The risk of the reduced value of the estate due to depletion or taxation on bequest.

Systemic risk ("Black swan")

The risk of a pronounced secular downturn in the economy and in capital markets.

Liquidity risk

The risk of not having funds available or having illiquid funds for unforeseen expenses.

Business risk

The risk of the cessation of operations of a financial institution and the adverse impact on insurance or investment products owned by the individual.

Risk of bad advice, fraud or theft

The risk of loss resulting from purchasing products or investments that are unsuitable or investing funds in a fraudulent operation.

Public policy risk

The risk of unforeseen increases in personal income tax or reductions in government pensions or health care benefits.

Other risks noted in the Society of Actuaries document

  • Lack of Available Facilities or Caregivers
  • Loss of Ability to Live Independently
  • Change in Housing Needs
  • Other Change in Marital Status
  • Unforeseen Needs of Family Members

What's next

Defining each risk is the first step for formulating a risk management strategy. In future posts, we will expand on these risks with the aim of finding ways to deal with each of them using one or more of the four risk management approaches at our disposal: avoidance, reduction, transfer or retention.

RetireWare Desktop Software

Where's RetireWare?

With recent advances in computing power, security and fast Internet connections, RetireWare is now a SAAS ("Software-as-a-Service") application.
This new version is Web-based and runs inside an Internet browser. The desktop version of RetireWare will no longer be offered for sale.

The new Web-based version includes exciting new features:

Redesigned user interface with dashboards and over 20 charts
  • Easy-to-use file management, in particular if the plan is for both spouses
  • Comprehensive risk analysis
  • Redesigned report
  • Flexible and editable report
  • Transition to Web-Based Version

The new application has a utility for uploading and converting existing RetireWare files to the new system.

Transition rules depend whether you are an individual or professional user.

Individual Users will be provided with a free license for the DIY version until December 31, 2012. Financial Advisors will be provided with a free license for for the professional version until December 31, 2012. Please act on these transition rules soon, as these offers expire October 31, 2012.

Timetable to Launch

The date for RetireWare Beta early access is July 15, 2012.
The new Web-based version of RetireWare will be available September 15, 2012.

What should I do?

Nothing. We will contact you via email with information on how to access the new version in the near future.

Here are a few links on the site for more information:

Friday, May 11, 2012

What is Risk?

Risk Defined
Risk is the potential that a chosen action or activity will lead to a loss (an undesirable outcome).

[...] Almost any human endeavor carries some risk, but some are much more risky than others."

-- Wikipedia
When it comes to retirement, risk is the possibility of a loss or other adverse event that has the potential to interfere with your financial security.

What is risk management?

Risk management is a methodology that looks at each potential risk and ensures that you identify and understand the risks to which you are exposed. This information helps creating an effective plan to prevent or reduce the impact of losses.

Risk management provides a clear and structured approach to identifying and dealing with risk.

Why manage risk?

As we are nearing retirement, many things can go wrong and derail our retirement plans. For example, negative equity returns, loss of employment or health issues can impact our planned standard of living or time of retirement. At the onset of retirement, poor investment performance combined with investment withdrawals can rapidly deplete assets. All these possibilities are risks that need to be managed to ensure we enjoy a worry-free retirement.

What’s the process?

Elements of a risk management methodology consist of these steps:

  1. Identify, characterize, and assess threats,
  2. Assess the vulnerability to specific threats,
  3. Determine the risk (i.e. the expected consequences of specific types of attacks on specific assets),
  4. Identify ways to reduce those risks, and
  5. Prioritize risk reduction measures based on a strategy.

So we need to identify and assess each risk, determine the potential outcome of each adverse event, find approaches to remove each risk and decide on cost-benefit trade-offs in order to arrive at a workable solution.

Techniques to manage risk fall into one or more of these four major categories:

  • Avoidance (eliminate)
  • Reduction (mitigate or control)
  • Transfer (outsource or insure)
  • Retention (accept and budget)

Retirement requires careful planning. Having a clear understanding of all risks allows you to prioritize them and have a contingency plan should they occur.

In the next few posts, we will explore each of the main pre-retirement and post-retirement risks.

Tuesday, May 8, 2012

Downsizing a Residence


I was wondering if there is a way or a work around to accommodate the downsizing of a residence?

I can't see anyway to develop a scenario where one sells their house and invests perhaps 70% the proceeds into their investments and the balance into a new residence with an accompanying mortgage.


Select 'Personal Residence' as a source of retirement income in 'Sources of Income' on the 'Options' menu.

Then click the 'Residence' tab and enter the year you plan to downsize. Select 70% for the use of the proceeds.

The value of the condo purchased with 30% of the proceeds will show as an 'Other Asset' in the Accumulation of Assets chart and table window and the rest of the funds will become available for retirement income in the non-registered investment account.

Wednesday, May 2, 2012

What is Monte Carlo Simulation?

Monte Carlo simulation is a mathematical method used to estimate the most likely outcome and the odds that certain events will occur, given a mathematical model of the problem.

Like the roulette wheels associated with the casinos of Monte Carlo, Monte Carlo simulation reproduces random outcomes by generating random numbers to obtain results. Unlike a roulette wheel, the Monte Carlo method uses random numbers to measure and quantify uncertainty and chance events.

The program generates random rates of return and develops a large number of potential future outcomes in the capital markets, assuming that past averages and standard deviations will hold in the future.

Expected returns from equity asset classes (such as Canadian, US or international equities) are typically higher than returns from low risk or risk-free investments (e.g., cash, GICs and fixed income). But higher equity returns also have greater risk, that is a greater range of outcomes, from complete loss of capital to appreciation many times over the initial purchase price. And they also experience greater volatility.

Probability of success

The probability (or chance) of success is the number of times that your plan is successful, i.e. the number of illustrations in which you have enough money to sustain your lifestyle until the end of your life, divided by the number of all simulations. For example, if the portfolio does not run out of money 800 times out of 1,000 scenarios, we can say that the probability of success is 80%.

As a benchmark, a probability of success of 75% or more is good.

Rates of return fluctuate from year to year and are based on the expected return and volatitlity (as measured by the standard deviation) of each asset class.

The chart below shows sample simulations for somone age 45, retiring at age 65 and with a life expectancy of 90. The variability of outcomes results from the degree of volatility, which increases with the proportion of assets invested in equities.

Sample simulations

Why is it useful?

The goal is to raise the comfort level knowing the odds of achieving pragmatic financial lifestyle goals, and feel comfortable with a financial plan, even in periods of negative market performance.

If a probability of 80% percent seems too risky and you would like to increase the odds to 85% or 90% , you can adjust your annual savings, retire later, reduce your income requirements or change your portfolio allocation.

The risk of hitting a string of bad years early on can easily upset a retirement plan. For instance, if you retired during a period as bad as the stock-market returns of the mid-1970s, you would run out of money very fast.

What traditional planning ignores is the timing of the returns. A Monte Carlo simulation highlights some of the problems that might arise in a down market shortly after retirement.

If there is not a high enough probability for success in achieving retirement goals, changes such as retiring older, saving more, adjusting income expectation or a combination of these become clear.

Success in early retirement can set the tone

It is important never to lose sight that the type of investments and allocation within a portfolio have a direct impact on the amount of volatility that can occur. Small foreign companies will have large amounts of variation in returns, while high-grade short term Government will have very little.

Monte Carlo should not be viewed as a certainty test. It is a probability test. Ultimately, there will be only one outcome, but knowing not to take more risk than necessary and finding a safe spending level is invaluable information.

Risky Business!

Welcome to this Blog!

In the last decade, great emphasis has been put on risk management in every area of our lives.

Risk management provides a framework around which we can make decisions. We begin by assessing risk and determining its likelihood and magnitude. Armed with this information we then search for ways to reduce, eliminate, transfer or retain risk.

When it comes to planning the financial aspect of retirement, a risk management framework is paramount, as we cease earning income and our livelihood comes from pensions and invested assets, which must sustain us potentially for several decades. Thus, a sound plan must examine each of the potential risks that can occur during retirement: investment, longevity, inflation, health care costs, early death and many others.

This blog will try to increase understanding of post-retirement risks and their impact on financial and retirement planning.


Marc Des Rosiers, F.S.A., F.C.I.A.
Apeiron Software Limited

Tuesday, May 1, 2012

Welcome to the RetireWare Product Support Blog

Product Support

We get a lot of great questions from users and want to share these with everyone.

So we will post user enquiries from time to time to build a valuable resource for new and experienced RetireWare users alike.

Here's my most important recommendation: view the interactive demos on the tutorials page.

They take only a few minutes each and will help you understand RetireWare very fast.

Here's the link:

If you don't find an answer to your questions, contact us:

Wishing you a great future!

Marc Des Rosiers, FSA, FCIA
Apeiron Software Limited

Software for individuals, advisors and financial services companies

Software for individuals, advisors and financial services companies
Retirement Planning

Featured Post

Quantifying Risk

Lightning and lotteries According to the National Oceanic and Atmospheric Administration, the odds of becoming a lightning victim in th...

About Us

My photo
RetireWare is a Web-based risk management and retirement planning software for individuals and financial advisors that's easy-to-use, full of rich visuals and comprehensive analysis. Try today and take advantage of our unconditional money-back guarantee. Know how much retirement income you can have. Build a plan and know where you stand.

Equisoft Inc.

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.

Follow by Email

© 2018 by Equisoft Inc. All rights reserved. Powered by Blogger.


© 2018 Risk Blog by Equisoft Inc. All rights reserved. Designed by Templateism

Back To Top