Fred Vettese is one of Canada’s leading retirement planning experts. The former chief actuary for Morneau Shepell spent his entire career working within Canada’s retirement income system. He’s written three books on retirement, including The Real Retirement, co-authored with former Finance Minister Bill Morneau, and The Essential Retirement Guide: A Contrarian’s Perspective.
Mr. Vettese’s latest is a completely revised and updated version of Canada’s #1 bestselling retirement income book – Retirement Income For Life. Most retirement books focus on the accumulation phase. Retirement Income For Life is aimed at people who are close to retirement, or who are already retired, and who are going to rely mostly on their own savings to meet their retirement income needs. It assumes your main objective is to maximize your retirement income rather than maximizing the assets you leave behind if you die early.
He decided to revise the book just two years after its initial release to help readers who were still a few years away from retirement improve their financial situation. He also reorganized the chapters into a more logical sequence, and added chapters to address special situations such as high-net-worth couples, early retirees, single retirees, and early death.
Mr Vettese also addresses significant developments since the release of the first book, which include expanded CPP and the possible introduction of deferred annuities that start at 85. He also touches on the potential fallout from the COVID-19 pandemic.
The five enhancements that made up the core of the first edition remain intact. These include reducing investment fees, transferring risk to the government by deferring CPP, transfer even more risk by purchasing an annuity, know how much income you can withdraw (and actively adjust it as needed), and have a backstop (likely a reverse mortgage or HELOC).
If you’re going to read one retirement book, this is it. Retirement Income For Life is an incredibly comprehensive and sensible look at how to think about retirement planning. Mr. Vettese offers plenty of wisdom throughout the book. Here’s one of my favourite takeaways from the section on investment risk:
“I used to research the market on my own and trade in individual stocks. It was hubris to think I was smarter than the crowd and could profit on a consistent basis by taking a contrarian stance. Over time, I did pick a few winners, but I also picked way too many losers. I didn’t beat the market anywhere near often enough to call the experience a success.”
He strongly suggests you not to become a stock picker or day trader. The odds are very much against you. Instead, participate in a pooled fund, such as an index you can buy in the form of an exchange-traded fund (ETF). The author’s takeaways in this chapter are worth the price of the book alone:
- Future investment returns will almost certainly be lower than historical returns for many years to come
- Stay away from investing in second mortgages
- Real estate investing can be lucrative for long-term investors, but it is not for amateurs and it is not without risks
- Long-term bonds will be especially poor performers, since bond yields have nowhere to go but up, and this would create capital losses. This includes real return bonds
- Your best bet for a 5% annual return is to invest in equity funds, risky as they are
- a 60-40 asset mix is probably better than 50-50 in the case of retirees with average risk tolerance
Retirement Income For Life Giveaway
I was fortunate enough to receive an extra copy of the newly revised Retirement Income For Life and I’d like to give it away to a lucky reader.
If you want to enter for a chance to win a copy of Retirement Income For Life, leave a comment telling me when you took (or plan to take) your CPP benefits and why.
Deferring CPP to age 70 is one of the author’s five enhancements for retirement income planning, but in reality this option is almost never taken. I’ve written before about when it makes sense to take CPP at 60, and when it makes sense to defer CPP to age 70. I’ve also explained why taking CPP at 65 is rarely the optimal choice.
The contest will close on Wednesday November 4th at 5pm EST. I’ll randomly select a winner from the entries and announce the winner in my next edition of Weekend Reading.
This Week’s Recap:
On Thursday I explained exactly how I invest my own money. Thanks for the great feedback on this article!
From the archives, here’s which accounts to tap first in retirement.
Remember travel? Here’s how I redeemed more than 1 million points for travel last year.
I’ve pivoted to cash back rewards in “these times” and hope to share exactly how I did that in the coming week.
Weekend Reading:
Looking to level up your rewards credit card game? Credit Card Genius has you covered with the best credit cards in Canada.
Here’s a heartbreaking look at five people who lost their jobs during the pandemic.
NPR looks at stuck at home moms and the pandemic’s devastating toll on women:
“The uncomfortable truth is that in their homes, women are still fitting into stereotypical roles of doing the bulk of cooking, cleaning and parenting. It’s another form of systemic inequality within a 21st century home that the pandemic is laying bare.”
The Evidence Based Investing blog explains the dangers of trading from home.
Rob Carrick shares several reasons to stop worrying the pandemic will be followed by a plague of tax increases. I agree.
Michael James on Money says that owning today’s long term bonds is crazy.
PWL Capital’s Justin Bender looks at tax-loss selling with ETFs in his latest investing video:
Does that sound too complicated to implement on your own? Check out this post on tax loss harvesting at work with Wealthsimple.
Pension plans will use a new method for calculating commuted values as of Dec. 1 that may reduce defined benefit plan payouts.
Here’s a smart take by Millionaire Teacher Andrew Hallam on what to do when financial experts say a giant crash is coming.
A Wealth of Common Sense blogger Ben Carlson says the question you should always ask when searching for higher yields is, what’s the catch?
Finally, Morgan Housel has a few questions that are relevant to everyone and apply to a lot of things.
Have a great weekend, everyone! (and don’t forget to comment below to enter to win a copy of Retirement Income For Life)
Our kids were off school during Thanksgiving week so we took a much needed mini vacation to Canmore / Banff. There were plenty of deals to be found that week and so we splurged on a penthouse condo with a private hot tub (through Airbnb).
It was so nice to get away from the mundane routine that we’ve found ourselves in over the past seven months. Don’t get me wrong, our daily walk around the community lake is fine but it doesn’t exactly hold a candle to the mountains and lakes in beautiful Kananaskis Country.
I can see these close-to-home mini vacations becoming more popular in the coming months (years?), and Airbnb is best positioned to capitalize on this trend. I wrote about my experience using Airbnb vs. hotels last year and highlighted my preference to have an entire place to ourselves, with a kitchen and a separate bedroom for the kids.
Hotels simply aren’t well suited to this type of accommodation, not to mention their other disadvantages for hosting travellers during a pandemic, such as shared entrances, elevators, and dining (forget the breakfast buffet).
Airbnb filed for its long awaited IPO this summer with the intention to go public later this year (rumoured to be in December). After business collapsed for the short-term rental platform during the lockdown stages of the pandemic, Airbnb has experienced a resurgence with weekly revenues hitting new all-time highs. Indeed, Airbnb’s revenues have comfortably surpassed Marriott’s for the first time.
Airbnb hopes to raise $3 billion in its upcoming IPO and achieve a valuation of more than $30 billion.
While the outlook for the travel industry remains incredibly bleak, the demand for short-term vacation rentals continues to grow and Airbnb stands to benefit the most from this trend.
When you sign up for Airbnb with a referral link, you’ll get up to $95 off your first trip. How it works is you’ll get $75 off your home booking, and then another $20 to use towards an Airbnb experience. An “experience” is an activity hosted be a local expert.
This Week(s) Recap:
I wrote about the growing demand for Green Bonds and RE Royalties’ secured 6% annual return.
In a follow up post from my Canadian Financial Summit interview I addressed the major gaps in your retirement plan.
I’m reading poker star Annie Duke’s latest book, How to Decide. It’s an excellent follow up to her previous work – Thinking in Bets – and is really a hands-on exercise to help you make better decisions in your life. Definitely worth a read.
You can also hear an interview with Annie Duke on a recent episode of the Rational Reminder podcast.
Promo of the Week:
I moved my RRSP and TFSA to Wealthsimple Trade at the beginning of the year. It took some getting used to the mobile-only platform but overall I’m happy with Canada’s first and only zero-commission trading platform.
If you’re tired of paying $9.99 per trade just to buy or rebalance your ETF portfolio then Wealthsimple Trade is definitely worth a look. It’s a no frills platform so don’t expect a ton of performance data and market research. But it works great for me and my one-ETF investing solution (VEQT).
Get a $10 cash bonus and commission-free trades when you open a Wealthsimple Trade account and deposit and trade at least $100. Sign-up today to take advantage of this offer.
You can also read my detailed Wealthsimple Trade review here.
Weekend Reading:
The newly revamped Aeroplan program takes flight on November 8th and the Credit Card Genius team explains what you need to know about the transition.
In a surprising development, WestJet is now offering cash refunds for flights cancelled during the COVID outbreak.
Financial author Farnoosh Torabi explains why and how she plans to die with an empty bank account.
No, seniors aren’t moving out in droves. Jason Heath explains the retirement downsizing myth and its potential impact on the housing market.
Rob Carrick looks at the cost in money, isolation and family stress when seniors choose to remain in their own private homes.
A guest post on the Blunt Bean Counter blog explains the pitfalls of two common strategies to try to avoid probate fees.
Jonathan Chevreau shares strategies for Canadians who are retiring without a defined benefit pension plan.
A great piece from Morgan Housel on why incredible progress that occurs slowly over time is less attention grabbing than a one-time disaster:
“Good news always takes time, often too much to even notice it happened.
But bad news?
Bad news is not shy or subtle. It comes instantly, so fast that it overwhelms your attention and you can’t look away.”
Rob Carrick explains how the cost of playing it safe as an investor is plain as day.
Of Dollars and Data blogger Nick Maggiulli explains why we should own bonds even with rates so low.
Millionaire Teacher Andrew Hallam also shares why you should still invite bonds to your portfolio party.
PWL Capital’s Ben Felix is back with another Common Sense Investing video. This time he shares the truth about day trading and your odds of success:
On that note, can advisors pick winning funds in advance? An overwhelming body of evidence suggests not.
A great idea from behavioural finance expert Shlomo Benartzi about reinventing the employer retirement savings match, framing it as a fixed-dollar rather than a percentage:
“Psychologically, it’s easier to forgo a “6% match” than to pass up “$1,200.” And the fixed-dollar approach could be particularly helpful for lower-income workers, for whom the set amount would represent a larger share of salary.”
Larry Bates explains why the greatest opportunity for retirees to make their savings last longer may be to reduce their investment fees. Indeed, a 2% fee on a $1M portfolio can be a retiree’s largest annual expense.
Most traditional money advice is built on shame, often packaged as tough love and personal responsibility. What if we tried empathy?
Retirement expert Fred Vettese says that since 2003, Canadians would have been better off renting than buying.
Michael James takes a thorough look at variable percentage withdrawals for retirement spending.
Finally, here’s an eye-opening review of a monstrosity known as the 2021 Cadillac Escalade – king of the oversized SUVs.
Have a great weekend, everyone!
A good majority of my clients reach out to me looking for retirement planning advice. They want to know if they have enough assets to retire comfortably, how much longer they should work, what type of investment strategy makes sense in retirement, when to take CPP and OAS, and how to set up tax efficient withdrawals from their savings and investments.
My conversation with Kornel Szrejber for the Canadian Financial Summit this year was about addressing the major gaps in your retirement plan. Below is a summary of what we discussed – but you can check out the full interview, along with the rest of the line-up, at the Canadian Financial Summit website.
Investing Is Just One Part Of The Plan
A common mistake that I see Canadians make is focusing only on what investments to buy, as opposed to seeing the investments that they choose as just one piece of financial planning and their financial wellbeing.
Can you talk about what trouble we as Canadians can get into, if we are only focusing on what investments to buy as opposed to looking at the whole picture?
It is common for Canadians to focus on their investments rather than looking at all aspects of their finances. In fact, most of the clients that come to me want to talk about investing.
Yes, investing is important. Setting up a investment strategy that matches your risk tolerance and time horizon, and more importantly one that you can stick with for the long term is crucial to your overall retirement plan.
But, when you step back and look at the bigger picture, you’ll see that financial planning is about so much more than investing.
It’s a comprehensive look at your spending. It’s about making sure you and your spouse are on the same page – understanding your values around money and aligning that with your spending habits. It’s about disaster proofing your life by having appropriate life and disability insurance, a will, and an emergency fund. It’s about mapping out both your short and long term goals so that you can prioritize your savings into the appropriate vehicle(s).
Attributes of an Early Retiree
You’ve worked with many individuals and families here in Canada. Are there any patterns that you’ve noticed between those that are struggling financially vs those that are on-track to retire early? (i.e. actionable things that people can do to be one of those that are on-track).
The people who seem to have it together tend to have a reasonably low cost of living and can max out at least their tax-sheltered accounts (RRSP/TFSA) each year.
They have clearly defined short- and long-term goals that keep them focused on saving. Many have a high income, but that is not a prerequisite to a good financial future.
They also automate many of their financial decisions, so they pay themselves first through automatic contributions, they set alerts to pay their credit card balance in full each month, and their investments automatically rebalance (through a robo-advisor or an asset allocation ETF).
Conversely, those who are struggling usually have some high interest debt and have trouble getting through the month without dipping into credit. They may or may not have a good handle on their expenses, but there’s just no wiggle room or margin for error.
That means, when something comes up, and it always does, any progress made goes out the window and they can’t seem to get ahead. They treat credit card debt like a way of life and not like the ‘hair-on-fire’ emergency that it is.
And, they typically don’t know exactly where their money is going from month to month.
Another major reason why so many people struggle financially is because their list of wants exceeds their ability to pay for them. I love the line from Paula Pant, author of the Afford Anything blog, that goes:
“You can afford anything, you just can’t afford everything.”
I think this is so true when it comes to our personal finances and all of those short-term goals and aspirations that we all have. Money is finite and we simply can’t do everything we want – at least not all at once.
So, I think the people who are on track to retire early have a good sense of where their money goes and they’re able to prioritize saving for retirement while juggling all of their other short-term needs and wants.
Not Enough Attention Paid To These Retirement Planning Decisions
Are there any important financial decisions that you find Canadians tend to oversimplify and make quick decisions about, when in reality they actually need thorough analysis and have a very significant impact?
Usually anything involving a bit of math.
One that comes to mind is when you leave a job and whether to keep your pension or take the commuted value and invest it in a LIRA. This is not a decision where you just want to take the advice of a friend or colleague. It requires some thoughtful analysis.
This is actually a decision I’ve had to make for myself when I left my day job earlier this year, and even I sought an outside expert opinion help me decide.
Another critical decision is when to take CPP. I’ve heard so many myths about CPP and that you should take it as soon as possible (i.e. at 60), but in many cases the most optimal age to take CPP is to defer it to age 70. This enhances your benefit by 42% and provides longevity insurance.
Finally, there’s the question of whether to contribute to an RRSP or TFSA. If you’re below a certain tax bracket it probably makes more sense to invest in your TFSA rather than an RRSP, and vice versa.
Impactful Financial Decisions
What would you say are some of the most impactful financial decisions that we can make to set ourselves up for success? And which ones can we do ourselves vs having to seek out the help of a fee-only financial planner like yourself?
Starting to invest at a young age and, more importantly, setting up a system to make the contributions automatic. You can start with as little as $25 or $50 a month. It’s not about the starting amount, but about building the habit of saving over time.
Be a savvy financial consumer and understand where incentives may be misaligned, or when the seller may not have your best interests at heart. That’s the essence of financial literacy.
Spend less than you earn, obviously, and try to avoid debt where possible.
Don’t buy more house than you can afford, and if you do buy make sure you stay there for 10 years.
For those seeking advice, I’d say the biggest decision is about retirement readiness. Do you have enough to retire and live a comfortable lifestyle?
The answers require a lot of math and careful analysis about your spending, rates of return, and determining how your various income streams all fit together at different ages in retirement.
That’s why William Sharpe calls retirement income the nastiest hardest problem in finance.
In reality, any major life event such as marriage, having children, buying a house, changing careers – anything that’s going to require a major shift in your own personal finances could benefit from some expert advice, or at least a sober second thought.
Reviewing Your Investment Portfolio
For anybody new to this, what are investment portfolio reviews, and what are the different things that you like to look for when analyzing if someone has any critical flaws in their investment portfolio?
I’ll typically look at a client’s investment statements to determine their asset mix and whether it’s appropriate for their age and stage. I’ll look at their holdings and see if there’s anything missing, or in many cases if there’s a lot of overlapping funds with similar holdings. There’s some odd stuff out there.
If it’s a managed portfolio, I’ll look at the fees and ask questions about what other value-added services (if any) they get from their advisor like tax planning, estate planning, goal prioritization, or if they’re just getting an email once a year at RRSP season.
One client recently asked for a second opinion on his managed portfolio and I determined that his low(ish) cost, well managed portfolio was well worth the fee and that he should stay put.
I’ll always share low-cost solutions like bank index mutual funds, a robo-advisor, or a self-directed ETF portfolio. More importantly, I’ll share the time, effort, and complexity required to manage each of those solutions to determine the best fit for my client.
The goal is not simply to go with the lowest fee but to find a solution that the client can implement and then stick to for the long term. That means meeting my clients where they are. For example, if someone has a bank managed portfolio of mutual funds I can point to the same bank’s suite of index funds at half the cost and suggest they talk to their advisor about them.
Investing for Early Retirement
For those that are working towards an early retirement or are already there, is there a particular portfolio structure that you like.
I’m a big fan of simplicity and would suggest either opening a self-directed online brokerage account (I use Wealthsimple Trade) and buying an asset allocation fund like the ones offered by Vanguard and iShares. Alternatively, if they’d prefer not to manage their own money, to open a robo advisor account and invest through a digital platform.
The simpler, the better. So, if you have multiple account types like an RRSP, TFSA, maybe a LIRA from an old job, plus a taxable account, I’d suggest just using the same asset mix in each account rather than tinkering with different ETF combinations in each account.
I don’t see the point of investing for income in the asset accumulation stage, but certainly once you’ve reached retirement age, depending on your level of assets, you could switch to an income or dividend strategy if your goal is to preserve your capital.
Related: Vanguard’s VRIF – Your New Retirement Income Solution
I’m likely to recommend a bucket strategy that includes 1-2 years’ worth of spending in cash savings, another 3-5 years of GICs in a ladder of rolling maturity, and then long-term investments in low cost, globally diversified ETFs. Use the GICs to replace the cash you spent, and then sell off some investments to replace the GIC(s) that matured.
Final Thoughts
It’s a common mistake to focus solely on your investments while ignoring other potentially more important aspects of your finances – the major gaps in your retirement plan.
Retirement planning requires careful analysis to put everything together, from your investments to your government benefits, workplace pensions (if any), housing situation, and legacy & estate planning.
There are enough low cost and diversified investment solutions out there to consider investing to be solved. Find the investing solution that works for you, automate it, and get the hell out of the way so you can focus on the other areas of financial and retirement planning that deserve your attention.