Planning for Retirement
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YOUR ALL-STAR RETIREMENT SPEAKERS
Frederick Vettese, actuary, Fellow of the Canadian Institute of Actuaries (FCIA).CFP and nationally known renowned expert on everything retirement. He is the author of The Essential Retirement Guide: A Contrarian’s Perspective, the Real Retirement: Why You Could Be Better Off Than You Think, and How to Make That Happen, and Retirement income For Life: Getting More without Saving More. Regular contributor to the Globe and National Post as well.
One of the Summit’s all time favs… as well as one of Canada’s favourite and longstanding columist, writing for the Globe and Mail since 1996.
Hello and welcome to another session the Canadian Financial Summit. We have a very special session plan today with Cameron’s preeminent Guru on saving and spending in retirement Fred Matisse bread is partner and former actuary at Wornall scheppel and author of several retirement books, including the recently updated and soon to be updated again retirement income for life.
So thanks for joining us today Fred. But it’s great to be here Kyle. Do the most common questions we get here at the summit every year are hey, how much do I need to save in order to retire? And when should I take my OAS and CPP and of course embedded in those questions are many smaller questions and variables and specific personal tastes and often we try to explain them and people’s eyes start to glaze over. So I really really appreciate the way your books and systemically laid out the answers these questions.
So let’s let’s start with step one. How much are most Canadians actually spending in retirement and how should we each estimate how much we’re likely to spend in retirement? Usual rule of thumb is that people ought to have a retirement income Target? Of 70% of their pre retirement gross income. So let’s say if you’re earning just to make make the math simple.
Let’s say you were earning a hundred thousand dollars you and your wife before retirement than you want to have seventy thousand dollars of retirement income. I don’t believe in that rule. I think that’s quite quite salty and it’s you can’t even find as to what we’re at theoretical basis for that rule would be it’s hard to really pinpoint or percentage because it depends on on income level and a few other things, but it’s not much closer to being 50% of your pre retirement income in 70.
The reason you know, that’s got to be the case is you look at at your working years and a big chunk of your income would have gone to work paying a mortgage you pay actually a higher level of income tax during your working years as well.
You’re also paying for the for children for raising children and that practical retirement savings when you take away all those things very few people actually live on more than 40 or 50% of their of their earnings after all those things are deducted on our free retirement basis anyway, so that’s that’s why it can’t be 70% after retirement.
That would actually be a pretty huge step up and send a living so that would be the first thing people ought to think about 50% as opposed to 70 Right, and and I I really liked how you Illustrated in your book in your most recent writing about how did we get to this and and what are some of the assumptions that I you know folks that work for the government used to sort of Leverage their pension payouts a little bit more.
I I enjoyed those as a teacher that that gets teased about his pension quite a bit. I enjoyed, um, sort of how you arrived. At a bit of a fun criticism of some of those methods. Yeah. That was that was kind of a touchy thing to do.
I’m I wanted to do it because I wanted just I wanted really to get across the idea that it really doesn’t have to be 70% So I did it in terms of the conversation between a couple and a retired actuary.
My publisher said it sounded like a bit of a rant to them and that actually tone it down but you’re actually seeing is the towing down version as someone who has been forced to tone himself down. I I understand where you’re coming from and and you just trying to put it in layman’s terms where where has this idea come from? Why are people basing it on this and sort of explaining your rationale?
Because I think I think you’re rationality. A lot of people would be surprised and I think a lot of financial advisors maybe when they read that that 40 50% number would probably be pretty surprised because you were the first place I had read that sort of income replacement statistic that how to use the 6th and 70% number. I want to give credit where it’s do though an actuary who was a Canada’s Guru ten years ago 15 years ago was Malcolm Hamilton.
Yeah and was the idea first 10 or 15 20 years ago that he was saying you don’t need 70% I I’m just kind of building on his ideas and and we’re writing about it for extensively than he did. So Yeah, I I definitely seen his his name attached to see some similar stuff. But like you say I don’t I don’t think the average person if you walked into a chapters. You wouldn’t find Mr. Hamilton on too many bookshelves. I don’t I don’t think so. Just not all he even though he actually writes really well. He just doesn’t like the process. He doesn’t like right. That’s exactly I didn’t know that actually no, there you go.
Um now you mentioned okay, that’s a good starting point whether you look at it and and sort of budget yourself out and you’re at 50% or whatever. The number is obviously that depends on lots of variables. If you own your own home what sort of holidays you want to take Etc, but are there some general Trends because I don’t think many people spend exactly that same amount of a percentage of their free retirement earnings throughout the whole retirement. They’re certain trends that you found fairly common in your years of looking at Actuarial data. In terms of spending spending patterns.
I’m assuming that once the standard of living is actually climbing slowly throughout once the working career you start off at a maybe a fairly low level and also you have higher expenses in your early years like daycare expenses and and you’re starting up a home you’re buying stuff for the home and so on later on now all those all that stuff is bought maybe the children end up being a lot less sick and expensive burden by the time you get into your fifties. And maybe the mortgage eventually gets paid off as well.
So what ends up happening is you’re going to find that the amount of disposable income you have will creep up and it’ll go from it may be as low as 30% of your gross income when you’re in your 30s, but it may be more like 50% when you’re in your your 50s now could it be even higher than that? If you’re not saving for retirement, so be kind of ironic that the only way you get to a 70% retirement Target is by not saving for it. So, right. Yeah, it’s a bit of a catch 22. However, if you do end up saving properly, so in terms of a trend, yes, I see people spending more money and being a better off in the 50s and they were in their 30s and 40s and they can be just as well off in their 60s and on by and still be spending the same amount in real terms as they were in their 50s. Now, here’s what happens.
Yeah, all the studies and I buy that I mean not only Canadian studies, but also International Studies also people tend to keep up their spending in real terms after inflation term. Throughout your 60s and then for the time to get to their early to mid 70s, they just started slowing down. They just start spending less money. They maybe have less of an appetite for or less energy. I guess for really exotic travel at that point in time.
I suppose maybe I may either have died or just maybe incapacitated because more and more things happen to us as we get older and we just find we can’t travel anymore as much as we used to and we just don’t have quite a bit as much of an appetite as we used to my parents had my when they were still alive. They hadn’t bought any any new sofas or other kind of durable items like that. I guess in many many years.
They just end up spending less money.
And so this is something that’s been been discovered in many countries in Sweden and in Britain Germany elsewhere that people just in spending less money in real terms by the time they hit their mid 70s. It’s not got nothing to do with their weather.
They have the money or not because that has happened at all income levels. So yes, so you can kind of expect when. If you’re planning for your retirement that yes, you’re spending is you’ll want to keep it up in real terms throughout your 60s. And then maybe you can maybe actually even think about spending a little bit less money by the time you hit your 70s and certain you’re eighties in real terms.
Yeah, I I was was talking to Dr. Wade Bowen in earlier interview and he was explaining a similar concept and talked about the retirement smile and it’s echoed much much the same thoughts that that you had there are so now if once we look at our budget we look we take we we read retirement income for life. We apply it to our own spending.
We’ve kind of got a ballpark estimate on how much we’re gonna be spending your retirement. How did we start looking at how much we should shoot for saving as we had in short time? What is your research revealed about sort of General goals to shoot for and the savings rate as we prepare for a Time. All right. I actually think that’s kind of an interesting question and what that isn’t really explored all that much that was kind of the thing that I explored in my fourth book the rule of 30.
So first of all, I I did a bit research.
This is all chapter one in that book. I did research by by looking at many many different sources as to how much money people ought to save for retirement. And I guess in the back of all reminds me having the we have the the automatic number of we should be saving 10% of our gross earnings, you know for retirement on a year by your basis that might have come from from The Wealthy Barber initially, but you know what? It’s actually hard to find a Canadian Source that’ll give you any number at all including the banks.
Even the banks that really tell themselves being really retirement oriented money to help you in retirement. They won’t actually give you a number as to how much you are to say when they do get the number they don’t actually have any science behind it. They don’t explain as to why that is the right number. It’s just a number that they’ll give you so so 10% that might say 10 to 15 percent something in the same might be more than that.
The funny thing is that the American sources this will be like the big investment companies in the US will be a lot more forthritable giving a number and those numbers will be extremely high. Like it’ll be 20% 25% depending upon when you start saving maybe even higher than 25% and all this support is very ironic as generally speaking people just don’t think of Americans as saving as much as Canadians do for retirement.
So it’s surprising that they get such high high percentages. Maybe that’s why with such a large number of Americans don’t really save at all. They just figure what’s the point to save those kind of percentages?
However, so but boiling all that down, I would say that if you were thinking about trying to save a constant percentage throughout your whole lifetime, it should probably be 12 to 15 percent if you were started in when you were 30 and saved until 65, not your body be and it’s 12 to 50% range and where you around that range depends upon how well you do with your Investments and how aggressively you invest having said that in my book.
I actually don’t think suggest people try to say 12% every year because when you’re in your early 30s as they say you’re starting out on a job you you have a couple of kids in daycare. There’s no way in the world. You can say that it’s been you have a high Maurice payments are over 30% as a you know of your your growth salary.
There’s no way in the world you can save that kind of money. So that’s why I came up with the rule of fairy, which is you’re saving for retirement plus plus your mortgage payments plus stay here that that equal 30% and what that ends up meaning.
Is that very, roughly. It doesn’t meaning that maybe you’ll save zero to five percent. In your early 30s, you may end up saving 10% in your 40s and about 15 or 15 to 20 percent in your 50s. And it won’t be any more owners saving in your 50s than it was in your 30s because you just have a lot more disposable income so you can actually do it pretty easily. Yeah, that’s I found that intuitively made sense and and probably your focused a little more on on that retirement late at the end of the tunnel and hitting a certain number in your nest egg is you had insert retirement.
And so then obviously saving a little bit higher percentage of your hopefully increased paycheck seems to make a little more intuitive sense. I wanted to ask real quick on that thread have you found like anecdotally and talking to people that as people type kids a little later and Frankly as as adult children have asked their parents to spend more money on them. Whether that’s from helping with a down payment or I know lots of 23 olds that their phone plans still gets paid by by their parents.
Have you noticed that sort of crimping that that sort of final few years push at all or not really on as a job. I’m certainly have personal experience with that. No, I you know, I I not so much that children demanding it but parents wanting to help certainly, you know, like the Canadian housing market these days.
I mean, especially in places like tomorrow Vancouver, there’s no way that kids the young people can even even buy a condo without some help from their parents, but with that first down payment, So this is no way that that can be done.
So certainly that’s going on and certainly, you know, helping with with things like possibly with the rent certainly with things like you know as you mentioned this as a cell phone plans, when when you do get together going up to a restaurant whatever then usually it’s Grandad who picks up a check that kind of thing so that that’s certainly goes on and and it’s once again shows that they’re they’re the ones who actually have the capacity to be able to do that much more than the the younger people do so that’s going on and Yeah, and probably they’ll end up doing the same thing in 25 years time when they reached the 30 year olds reach 55 sure pay it kind of pay it forward. They’ve over.
Yeah. So I one of my favorite pieces of your writing Fred has been your writing around annuities. Um, I think it’s like an underrated product. I really learned a lot from how you talked about when to You know when to put them into play when the ideal time is the pros and cons of it. And I found them especially interesting because as a teacher I often in the butt of a lot of jokes or some hopefully good-natured teasing about.
Oh, well, you got a pension you don’t even have to worry about financial planning and then I always kind of talked about annuities and say like hey, You want some sort of worry-free income for life. Like I’m pretty sure these major insurers aren’t gonna go bankrupt anytime soon. Have you looked at this and they scoff at the idea of annuities most people if they’ve heard of annuities at all are instantly suspicious. So what what is your research basically revealed if you had to summarize for folks that haven’t yet read your books. Yeah so much. You can say I can say about annuities.
So it’s some I guess I won’t for press first and foremost.
So I put an annuity as first of all life annuity and the way I’m talking about it is something that you buy close to retirement.
You might be 65 when you buy your or older and what it does for a for a single premium.
You might fit down 100,000 maybe more than that it then pays you a fixed amount for life with my pay you for example dollars.
It might you might get about $6,000 of annual income for the rest of your life. So that’s kind of what an annuity is and it’ll it’ll pay you that if you live until a hundred eight or whatever. It doesn’t matter when when you die, it’ll keep on paying you there could be some death benefits or survival benefits attached to it, but that’s not getting to that complexity.
So that’s kind of what it does and it’s got It’s quite secure in Canada even in the United States. There have been no situate no cases ever of what people losing one dollar of income as a result of buying into an annuity in Canada even during the Great Depression.
The insurance companies have always been able to pay up on that and they also have a special fund for that or Special Reserve just to make sure that that’s the case so you don’t have to be worried about that at all. So what you got is you got certain income and and you’ve got that income for life no matter how you let’s say you have longevity risk covered. So the question is why so few people take it what they call the new annuity puzzle in Canada.
So it’s less than five percent. It might actually be less than two percent. It’ll actually have good numbers on how many people actually take it but we know it’s very very difficult thing to sell. And I think it’s partially because it’s such a black box. You give a certain amount of money to an insurance company, then they’ll tell you well prep based on that. We’re going to pay you this much for the rest of your life. You don’t know how the money is invested.
Really? You don’t know how what their expenses are behind the scenes and so on you just have to kind of take it on paper. That’s this is the best you can get and if you buy an annuity without any sir death benefits or survival benefits, then you have this fear. Well what happens if I die a year after I retire I didn’t live 40 more years only the one more year and they they keep all that money and people hate the government keeping their money when it comes to the Canada Pension Plan. They also and a similarly hate insurance companies keeping their money.
I am getting their hands on the money and they’re not being able to get it back. And this actually brings up an interesting point that is people will tell you that the biggest concern of retirement besides health is outliving your money, but it seems to me like more the biggest concern in life. Yeah, people haven’t retirement is where they give their money to an institution including the government and and then they die young and so then they feel embarrassed because of the fact that they kind of they left money on the table. I do point out that there’ll be dead. So they really can’t feel embarrassing else like that’s not going to happen.
So that’s really not that should already be the issue if they’re dead early. They have bigger bigger problems and not getting every single last penny from that that annuity. But nevertheless that is how people feel about it. So now and I was Freddie gung ho on on a nudies before before the last few years with covid. Our rearing is ugly head now with covid and held the government spending that came out of it. Now we have high inflation.
This is something I really haven’t hadn’t really factored in because inflation has been pretty tame for 30 years and I thought we can kind of assume that’s going to be the case going forward so inflation. Does two things that it makes annuities. It makes a new is more attractive if you think inflation is peaked and it’s going to go down because now rates are much higher which means that cost of annuity is much less than they used to be. That it wasn’t even say a year ago. So that’s the good news. I’m assuming inflation does go down on the other hand. It’s introduced a new uncertainty like will inflation be rearing it’s ugly head again five years ago.
We could have said no that probably is pretty unlikely. But now we can’t say that anymore a true dual government or some other government and we don’t know how much they’re gonna spend and what kind of inflation problems are going to going to be a causing but we can’t assume that inflation is going to be 2% every year because well it hasn’t been for the past year or two and we now have inflation in Canada at around 8% So that is definitely a very very bad thing for for annuities.
But having said all that I I do point out to people I’ve never expect anyone to put all their nesting into an annuity. I like the idea of about 25% of their nasty. So if you say if I private a thousand dollars, maybe you’re putting in a hundred hundred fifty thousand dollars in the annuity, but no more than that.
Yeah, I I wondered about this a friend when I was reading your annuity chapters. Most people have this idea of like the 60 40 portfolio or maybe you know, they’ve tweeted a 70-30 portfolio that sort of thing as they had insert retirement where 70% equities 30% fixed income.
Have you ever played around or research the idea of taking that fixed income portion and just making that in annuity and then that giving folks the confidence to ride out a far more volatile portfolio where you can essentially have the most of your portfolio and equities. I totally you should you should only definitely be thinking that the annuity personal let’s say my example that you actually end up playing saying the 25% of my of my Nest Egg.
I’m going to be spending to buy an annuity from an insurance company. That’s really the same thing as having money in Bonds. In fact, it’s even a bit safer having money in in government bots. So now that you’ve done that it’s like 25% your property was in fixed income. So Brad, so then you take your either the rest of your money man before you would have put 60 40 60% in stocks 40% in bonds. You should be thinking about having much.
Yeah, as you said much higher percentage of that money inequities in stocks and it’s hard to get people there because they Every every service provider you go to let’s say you went to a wealth simple with your the rest of the money you had 500,000 but you gave $150,000 to an insurance company $350,000 left. They’ll be wanting to put you into a 60/40 portfolio or 50/50 portfolio and the kind of ignoring the annuity portion.
You shouldn’t be you ought to be looking at this thing. holistically got to look at all the pieces and and as you say you ought to be just thinking about having a much higher percentage of the rest of your assets in stocks, and that’ll kind of get over some of the maybe the qualms vote.
Well, maybe they’re just too stodgy and they are providing enough income. Yeah, I’m curious it never anecdotally talked to folks who just decided to annuitize like The 4% rule is this rule that we talked about on the summit before and and you look at now. If you were to buy an annuity today, you could like you say get a joint annuity in the range of 5.5% somewhere in there and just a nude eyes 100% of the portfolio.
Have you ever see folks convince the English and how has it worked out for them. You’ve ever talked to folks that way. In what I’ve talked to very few people have actually purchased an annuity. So I can’t really get much another way of anecdotes about Butternut annuitizing. Yeah, that’s fair enough. I just wondered if anyone would have it.
It might be you but there are there just aren’t many people that are doing it out there. Um, one thing I was I was interested in your books. So my when I was comparing the immunity to the teacher’s pension, obviously, that’s what I have a little bit of experience with we have a two thirds index on our on our teachers two thirds of the CPI is is what we get as a Canadian teacher a man talking teacher’s pension update yearly and we’re you learn to actually that much of a fan of the movies that were indexed for inflation.
Why was that why what has been your experience with those specifically it’s all based on costing by actual fact that the costs were right. I would say that there’s nothing wrong with that at all.
But however, there’s two things. First of all, it’s based on cost the cost of buying an index. Would be from an insurance company is too high. They their assumptions are way too conservative for it. I supposed to have by buying a flight annuity.
So that’s one reason. I don’t like it very much.
The other reason is because I think you ought to be looking at all your sources of income combined and and that’s what I was saying earlier. So for example, if you end up buying an annuity with some of your money Then you you can think of the rest of your money the money that’s still in in a riff for example that it’s going to be filling in the gaps. So let’s say you also take my other advice about deferring Canada pension plan until age 70.
So you haven’t got that coming into late 70 so you can have a pretty bumpy income from you know, the annuity is a one piece of it, but the amount coming from the rift has been a very very by year the kind of pension plant doesn’t even come in until age 70. So the thing is, how do you want to make the whole thing smooth?
You don’t really care about any very single pieces. But so if the annuity you’re talking about, it’s Intex or not doesn’t really make a difference because that’s 21 component.
You want to make sure that the sum of all the components is smooth and to make it smooth means usually that you’re going to have to take more money out of your riff in the early years in order to smooth that income and then later on more of the money’s gonna be coming from the annuity plus CPP and old age security after age 70 Yeah that I like about the two-thirds in indexation…
it’s probably about the right percentage based on what I was saying earlier about people’s father people spending habits that they probably do maybe spending I’ll be keeping up with a hundred percent of inflation in the early years, but then less than that later on but two thirds overall is not not too bad a percentage.
So that the folks running demands over teacher’s pension are doing a pretty Opa job then. yeah, yeah you the last thing any question I had read was how do we go about because obviously if people are making one of making this huge purchase and that’s as you mentioned one of the big hurdles to get over as far as getting late person to understand annuities as weight.
I got to put down a hundred thousand. I got to put down 30% of my nest egg or whatever the case may be. Um, the funny part about it is the folks that decided to do it. Actually you wrote In the book. They don’t put all that much time and research Angel researching this stuff. How would you go about comparing a new things?
I’ve looked online. There isn’t as much stuff as I would have thought in terms of like comparing Apples to Apples and Community Market. How should folks will go trying to get the most bang for their buck when they are looking at a Millions. Well, you have to go through a broker and you ought to be just getting as many quotes as you can obviously the coach you’re going to be getting have to be on the same the same terms exactly like the same death benefits the same starting age and everything else. So you just get get the best quote you.
Can you may want to look at the the quality of the insurance company? Maybe if it’s some much smaller Regional insurance company versus like a big big name likes that’s like like sunlight. For example, you might take that into account. Although as I said earlier all the insurance companies have been pretty safe in Canada when it comes to that.
But yeah, so your broker should be doing it doing that shopping for you. Someone mechanics can provide can provide a suite of annuity quotes from different insurance companies. So that that’s a good source for me. I don’t know what extent that sources of available for anybody who’s buying an annuity, but they certainly are happy to give me me quotes. So and that’s what I often. Okay, so canex is actually as far as once you find and advisor broker that it’s qualified and can do this for you Canada. It’s actually a very transparent market.
Right? Like it’s it’s gonna be a pretty competitive market in Canada as far as annuities go amongst the major players. Yeah, that’s right. Matt. That is correct. Right. Okay, we’re gonna move on to CPP and OAS here our other major question that a lot of folks ask and Franklin there’s a lot of misinformation out there about what general recommendations that you have. I know it’s one of your major enhancements is look you got to look at the numbers when you’re looking at the long term of when you should be taking some you know, as what what sort of general advice do you have for folks? Um, my general advice is that for the vast majority, but the majority of people people who have significant retirement savings and they’re trying to figure out should I start my CPP as early as possible or at 65 or should I wait until age 70 my my basic advice is that it’s usually makes sense to wait until age 70 in other words deferred until 70 at CPP at 70.
You say well, why would I wait until somebody start getting my my pension is CVP 70 is 42% greater than it is at 65. um And in fact, it’s even more than 42% greater because it it goes up every year the well for the new maximum free for new retired resources over here with the change in wages not in prices and wages last few years have been going up faster than prices and that’s what they do in the long run.
They go up question prices by maybe almost one percent per year so you can think of it 42% minimum and they had to be closer even to 50% greater at age 70 than 65 Um, and and when you do the math on this like you take the breast value of an annuity starting at age 70 versus annuity starting at 65. You just find that it’s it’s worth a significantly more starting at starting earlier than 60 and 70 on top of that you’re buying into something that’s pulling indexed to inflation. Let’s see kind of pension plan that pension is going to be fully inflation protected for the rest of your life and also has gives you full longevity risk as well. Even if you live until 108 like it was saying earlier you’re gonna keep on getting that CPP plus the inflation protection every year up until the up until 108.
So that’s that’s actually pretty powerful. I mean even if the present value came out comparable he said well, you know, what worth about the same which it’s not but if you said it’s worth the same 65 or 70 you still should do that 70 because you got the the security and one thing you don’t want to be doing when you’re 75 or 80 is really worrying too much about well is my money invested. Well and what happens if I take a big if the market market really dips and am I going to be able to get as much income and he shouldn’t have to worry about those kind of things you ought to be trying to minimize that they think you have to worry about one way you minimize It Is by deferring to CBP until 70 and getting a much bigger inflation protected pension for the rest of your life. That’s how I feel about CPP.
OES I have was well and definitely would be the wrong word. I was still I was so favorite waiting until 74 OAS as well. But I was nowhere near as gung ho on OS as it wasn’t CPP. My major reason is as I just mentioned they CPP is bigger at 70 by at least 40% The OAS is only bigger at 870 by 36% versus 65. So the the bump up is smaller. and so and also I figured if I’m having such a hard time convincing people of deferring the CPP. There’s no way they’re going to be differing OS as well.
So I’m just gonna save my breath.
Now what change things is is covid once again the pandemic change things because it made inflation a much bigger issue. And and it’s just to me a no-brainer that if you can maximize your lifetime inflation protective pension. Then you ought to do so as long as no the cost of doing so is his minimal to you and cost really here is essentially zero. So if you wait until age 70 to get your OAS, it’s gonna be a bigger by 36 percent and it’s in inflation protection protected 100% inflation protected for the rest of your life.
Why wouldn’t you do that as long it as long as you have enough assets, you know, like in your rep or RSP that I have enough assets to to see you through your 60s until a 70 then you’ve kind of have a date after that. Yeah, it is an interesting trade-off that the idea of look draw down that RSP aggressively.
If you have to in order to cover those those expenses, I the praise I like that you used was you’re essentially moving your personal portfolio risk over to the government side of the budget and you’re basically getting government provided Insurance on their portfolio, you’re shifting it to the government’s portfolio risk, which I really I like that sort of idea of letting the government be responsible for more of the future market returns or lack thereof. You don’t got to worry about it anymore. It’s even more than that.
I mean, yes, you’re you’re doing that you’re Shifting the risk over to the government. And if the government was charging you a reasonable amount for that perception for taking on that risk, I’d one or two percent of your assets.
Nice. Well, that’s such reasonable but they’re not charging you anything. They’re actually giving you a bump in invention by doing it. You’re actually getting more more of a bump and then maybe you should be given we’re interest rates are so so it’s that’s what makes it a no-brainer. They’re actually not charging for that for the cost of that insurance.
Now for folks that have had some health problems Fred what what is there like a break even a rough Break Even ballpark age that you say look? If you make it here, you’re you’re playing with the house money if you possibly before yeah, okay, you’re you’re gonna leave a little money on the table.
Is there a rough page? Yeah, I I don’t like to to get break even numbers. It’s gonna be somewhere in your 80s, but I don’t like doing that because so we actually we try to take all all scenarios into account. So when we do a present value of calculation, we’re saying what happens if you and I say you’re currently 65 what happens if you live until 66 and then die and what he under each scenario but happens you live until 77 and die and then what do you get and so on already what happens you live into 105 and die.
So we look at all the scenarios and then we add them all up. That’s what we do. And that’s how other president value calculation is when you’re zero in on a break even Point you’re looking at just one scenario out of out of an infinite number.
So we have by the universe into account. I think it’s a much more holistic way of doing things for example, people say what happens if I die before 70. Well, I point out that there’s less than 5% chance that’s gonna happen. So yeah, you might be yeah, obviously you’re gonna be dead that’s not gonna be good and maybe you could have done better with the different investment vehicle.
But that’s only a 5% possibility. You have to look at all this scenar. Especially the ones which are more profitable. Yeah, absolutely. So I know when I talk to a lot of Canadian retirees, especially recent retirees after covid Fred, one of the the real issues they have is there’s they’re terrified of long-term care costs. They they worry that okay. We’ve got this spending smile and retirement.
I was spending more during the Go-Go years when I just retired and then there was maybe a bit of a law, but my last two years I have this anecdote from this third cousin twice removed that they needed hundreds of thousands of dollars at the end of their life and I’m terrified that I may need that too. And so I how much do I need to worry about long-term care and should I be worried about protecting for this should I save a fairly large lump sum of money? How should I prepare for this? And in your your books that you wrote a few years ago?
I thought you had a really interesting take on how the average Canadian should sort of look at a risk adjusted picture of long-term care. So first of all, your your costs can your can go up if you end up requiring extensive long-term care in your your later years that tends to happen in one’s eighties and the ones late 80s or even once 90s as opposed to happen.
And once said 70s number one and your toss can go up what mitigates it someone is that the fact that you’re now in that situation. It means that you don’t want to spending a lot of money on things like travel and entertainment and so on so there are some places to work by your costs are offset. So but so the question is what overall though cost can still be higher when you’re 88 them when they were when you were 68.
So what you gonna do about that? We can save money for it. But question is do you really have to most people will have a paid for house? And and so they they can actually rely on the equity in that house to be able to cover the cost of it happens because it’s not gonna happen for sure a practicing people will be will have to be in the long-term care maybe a quarter of people that will end up in long-term care. And if they do they tend to only be there for two or three years that’s the usual length of time people are in long-term care. So the idea of having a extensive array of doctors and nurses for 20 years. That’s really not going to happen. So so it can be an issue. But as I said, yeah the equity moment when someone can cover that and you can cover it by reverse mortgage so you don’t actually have to sell anything off whatever it’s it.
There are ways to tap tap into that equity. Yeah, so that would be basically what I would say about it. Now. The question is should you buy long-term care insurance? Hi in my book essentially retirement guide I had seven reasons. That’s why that was a bad idea and and but I’ll just don’t give you one reason but you want from insurance basically is you want to be able to pay a fairly small affordable amount and you wanted to cover the catastrophe no matter what happens like your house burnt down. So you want to be able to pay help home insurance premiums so that if your house burns down, they’re gonna replace it.
Quantum care insurance is the exact opposite of that the premiums are very large and they don’t cover you and they the kit has to be they just can’t cover a certain that amount of costs that when they arise and and when I actually did I I actually didn’t illustration because I got some real numbers and I said well, let’s assume let’s assume that we didn’t go for the long-term care.
We just use the same amount of money. We put that money into into a tfsa or exceedings account all those years earning interests at a pretty modest amount and I found that for the typical kind of a of a claim you’re gonna make in long-term care that the money you’re saving like that way is actually going to be just as good as hadn’t put the money into alarm term care insurance.
And normally that’s not the case not the whole thing about insurance is that if you hate being premiums, but if you get a big claim then you say thank God I I pay the premiums in this case by paying the premiums. You’re not actually any better off. Then yeah, that’s pretty compelling a pretty compelling case that that maybe the market the market wasn’t quite given you as much bang for your buck in terms of an insurance product as other ones did. Yeah. That’s right. So I’ll get you out of here on this one Fred when we’re looking whether it’s end of life care or end of life increase in in spending needs. What what are your thoughts on the advanced life deferred annuities or the ELD? Alda’s?
I know they’re relatively new in Canada is is that a more effective way of addressing possible tail risk in longevity this then then like a long-term care insurance or if listen if you follow my enhancements that I outlined in the book don’t worry about a Alda it’s there.
They’re not needed.
They’re not worth.
I looked at aldas and I thought they were gonna be a great thing. I mean when I first when I first heard about the possibility, I know they had these people for quite a while in the United States. I thought this would be great to have in Canada or anything analysis. I finally weren’t all that effective part of the problem is that interest rates are are so where they were so low at the time and they will be low you’re gonna have interest rates at 2 percent or three percent, you know, the the cost of the Alda is higher than you might think it would be if you let’s say you’re 60 60 years of age buying an Alda to start the age 85.
You think the constellation should be very minimal because you’re discounting for all that all the interest between 1680. um, but as I say with low interest rates and to be much much less compelling than they would have been so that was part of the problem with with the alda’s the other part of the problem. Is that yeah. If is that the they turned out not to be as effective as simply deferring go he has to CPP as I said, those are like Alda is kind of like a like a an insurance against living too long. But those were actually seem to be more effective ways of doing it.
So ultimately I figured it’s not such a bad thing. If for people who are more in the truly affluent, you know category maybe the top top 20% of berners who are putting aside a little bit just so they have some peace of mind in case some investment goes really bad or they have to they have some some spending shock that they didn’t think was going to happen so might be good in those kind of situations, but I didn’t think they were gonna be all that compelling and ultimately if we can’t convince people to buy annuities when the payments start tomorrow. Are we going to convince them to buy a newbies one payment for 20 years?
Yeah, that’s that’s a great point. I know that most malesky has talked about this a little bit as well. He’s a pretty big proposal. He said that’s ultimately the issue is just trying to get a market. Just trying to get enough interest to get the the producers to produce such a product. So I thank you very much Fred for coming on and and giving us the benefit of all your wisdom for that you’ve gotten as an actuary over the years and as an author working folks find out we talked a little bit before we started reporting here.
What have you got on the goal? And what what should folks be looking for from you in the next one? All right already our other article still Google Mail as I always do so I’ll be doing that and I guess I’m I’ll be doing some press research in the next few months because I’ll be working on the Third Edition to retirement income for life. Which is a book called by the accumulation. So as I do that research, I know no doubt some Revelations will be popping out and I’ll be happy to share my my insights with people through my articles.
Right retirement income for life for a post post covid post inflation World here a little bit. All right. Thank you. Once again, Fred and we’ll talk soon. My pleasure. Thanks Seco. Bye.