Frederick Vettese tells you right up front that while he sought to use “layman’s terms” in his newest offering: The Essential Retirement Guide – A Contrarian’s Perspective, it is NOT a beginner’s guide to finance. Given those parameters, I think this is a great book.
Make no mistake, this Essential Guide is not a stand in for books like the Millionaire Teacher, The Value of Simple, The Wealthy Barber, Wealthing Like Rabbits, or Stop Overthinking Your Money. Vettese isn’t going to go into the basics of how to budget money and invest the difference. Instead, he’s going to show you exactly how to take control of your retirement, and how to separate the facts (that you need for planning purposes) from the BS myths that are put out there by many folks in the financial industry. While his takeaways are pretty straightforward, his rationale and/or his “proofs” are a little more dense/detailed – especially if you’re not the math type. It should also be noted (and I found this original and refreshing) that Vettese writes from the point of view of an actuary (who has been working in the retirement field for several decades). He is not a trying to be a mainstream charismatic TV personality, or a teacher that is introducing people to topics. Instead, he doesn’t pull punches when discussing life expectancy, housing costs, declining cognitive functions due to age, and probable investment returns. Don’t expect to have your hand held!
Is The Essential Retirement Guide for You? Only If You Ever Want to Retire
The Essential Retirement Guide is written for Canadians and Americans, but gives specific examples for each group of people; so, it is very relevant for Canadian readers of all ages. The elevator pitch for the book is basically, “We are not as ill-prepared for retirement as we’re constantly being told that we are.” The pleasant offshoot of that is that preparing for retirement doesn’t have to be as difficult as we think.
Vettese admits right up front that this book really isn’t aimed at folks in the bottom third of annual income earners. His rationale is that most Canadians and Americans that are lower-middle class or below, will likely have 60%+ of their before-retirement income replaced by basic government benefits. As such, they should not see a significant dip in their lifestyle. Vettese instead takes a look at this “middle-class retirement crisis” we keep hearing about – and finds things in remarkably good shape.
One of the first facts that Vettese throws out there is that 88% of Canadians and Americans that passed away at age 85 did not outlive their assets, and had something left to pass on to their loved ones. He believes this shows that most Canadians grossly overestimate the likelihood they will die a pauper in a rocking chair somewhere at 103 years old. While Vettese describes himself as an “ant” in the grasshopper vs ant fable/analogy (*Hint: If you’re reading a personal finance blog you’re probably an ant*) he wants to make the point that you shouldn’t build wealth for the sake of a big bank account, but should instead, seek to place yourself between the extremes in order to enjoy a relatively high standard of living throughout your life.
Vettese’s Six Simple Steps to Retirement Planning
- Save 10% of your pay each year.
- Invest it in low-cost funds (like those in the model portfolios in our free Investing eBook)
- Keep the asset mix the same, through good times and bad [editor’s note: not your whole life, just don’t go chasing trends]
- Apart from the mortgage on your home, avoid going into debt.
- Pay off your mortgage before you retire.
- Buy a life annuity at retirement.
Separating Truth from Myth
Because he appears to have a love affair with lists, Vettese then immediately jumps to a list of key realities his research has uncovered (paraphrased for brevity):
- Saving 10% is a great rule of thumb, but if you can’t quite get there early in your career, the world won’t end.
- Retirement planning is as much about how you are used to spending your money in your working years, as it is about building up a big nest egg.
- Most people never spend more than 50% of their gross income on themselves before retirement – so why would they need to access 70% of their average gross income after retirement?
- Don’t count on rising interest rates to bail out your low savings rates.
- Understanding how long-term investing works and adjusting your exposure to equities when you are younger – before scaling back on risk as you get closer to retirement – will certainly help you reach your retirement goals.
- Your lifestyle choices will likely have a large effect on how long you live, and consequently, how much you need to save.
- You can likely withdraw more of your investment portfolio each year during your retirement than you thought (5%!).
- As you grow older, an annuity isn’t a bad option for several reasons. Chief among them is that your mental faculties can quickly deteriorate.
How Much $$$ Do You Actually Need to Retire?
Using “back-of-the-envelope accounting” (it’s obvious that as an actuary, Vettese’s back-of-the-envelope is much more detailed than my back-of-the-envelope) Vettese believes that every $10,000 in annual income you wish to have in retirement, you should have $160,000-$225,000 in tax-sheltered assets. It’s important to think about what your average tax rate will be after retirement when looking at your RRSP nest egg because when you withdraw those assets they will be taxed at your marginal tax rate. Remember that your average tax rate is not your marginal tax rate. For example, if you earn $40,000 in income and/or interest in Manitoba, you’ll owe about $7,810 in income taxes ($4,301 in federal income tax and $3,509 in provincial income tax). Consequently, your after-tax income is $32,190. In this hypothetical situation your average tax rate is 19.52%, but your marginal tax rate is 27.75%. Any more of your RRSP nest egg that you withdraw will be taxed at the marginal rate as it increases.
Money for Life?
I found Vettese’s case for annuities really interesting. I never thought about mental deterioration affecting my ability to manage my own investments (I’m superhuman in my own mind – just like everyone else I suppose). When you combine that consideration with the simple and straightforward idea of a certain amount of money coming in every month, I think I’d have to agree with Vettese that these products deserve a second look. I (like most Canadians) previously subscribed to the idea that annuities were kind of a vague proposition and that usually meant a financial institution was trying to screw me in some way. While Vettese isn’t a fan of indexed annuities, he puts forth a pretty convincing argument for the basic version, that is worth reading if you or someone you know is getting close to figuring out how to draw down their nest egg.
When you read and write about personal finance almost daily, it’s pretty rare to find a completely new concept. Vettese surprised me when he talked about a bit if a unique “back-to-back” strategy that he recommends for people that are worried about the fact that if they annuitize their savings and pass away sooner rather than later, that the bank keeps all of their money. The main idea is that you annuitize and then use a solid chunk of the monthly amount you get to purchase term life insurance until you reach an age when you feel like you got your money’s worth from the annuity. This arrangement would give you a guaranteed death benefit if one of your main financial goals is to preserve an inheritance for your loved ones. The really geeky side of me was interested to learn that an all-in-one product that used this strategy used to exist, and was called a tontine.
- There is statistically very little chance that you as a retail investor will do better than your pension plan option at work. Especially if there is any sort of pension match available. Don’t ever leave pension match money on the table!
- In Vettese’s work, he looked at a bunch of defined contribution plans at big companies and found that a third of folks contributed nothing to them when there was a 100% contribution match. Crazy!
- Personal genome testing and life expectancy going forward. Interesting stuff you don’t see in many personal finance books.
- Addresses long-term care fears and how to prepare for them (*Hint: You’re unlikely to need long-term care for very long – regardless of the anecdotal evidence you know of)
Here Is What I Don’t Get…
- Vettese wrote a fairly popular book with Bill Morneau and appears to have a long-term working relationship with him. One would assume they have similar thoughts about this whole retirement readiness thing…
- Bill Morneau is one of Canada’s new Members of Parliament, and our Finance Minister. He appears to avidly support the idea that Canada desperately needs to increase the CPP.
- Yet Vettese (and to a lesser degree, Morneau and Vettese in their last book: The Real Retirement: Why You Could Be Better Off Than You Think, and How to Make That Happen) just finished telling us that we’ll all be just fine and that Canadian benefits are doing exactly what they’re supposed to do…
- What am I missing here? In case you missed it, Robb Engen and I recently discussed this CPP plan using a new informal blog format.