How Retiring Investors ThinK

Last August, J.P. Morgan Asset Management released “Retirement By the Numbers,” a report that examined how investors approaching retirement manage their portfolios, their income and their spending.

The report drew on a data base of 23 million 401(k) & IRA accounts. They reviewed the activities of some 31,000 people as they approached or began retirement between 2013-2018. (401(k) and IRA are retirement accounts similar to RRSP & RRIFs).


Research from the report suggested:

a) “De-risking” is common place. Three quarters of retirees reduced their equity exposure after “rolling over their assets from a 401(k) (RRSP) to an IRA (RRIF).

b) Retirees relied on the mandatory minimum withdrawal amounts when determining how much income to draw.

c) Income and spending are highly corelated. Where income amounts were increased (i.e. from social  security, pension plans, etc.) spending followed.

Retiree Profiles

The retirees studied in the report shared the following characteristics:

a) Roughly 30% of the subjects received pension or annuity income.

b) The median value of retirement  accounts was $110,000.00

c) The median investable assets were estimated to be between $300,000 and $350,000.00 (i.e. balance being held in non-registered accounts).

d) The most common retirement age was between 65-70.

e) Age 66 was the most common age to start receiving Social Security.

Other Observations

The study also recognized the following trends.

First, retirees who waited until the rollover date to “de-risk” (i.e. rebalance their portfolios) needlessly exposed themselves to market volatility and the potential for loss. For example, those  re-balancing their portfolios in April 2020 after the COVID pandemic, were still down 5-6% after the markets had recovered a year later. Retirees ought to consider rebalancing portfolios prior their obligatory rollover (age 71).

Second, the majority of retirees were using the RMD-required minimum distribution as a guide for withdrawal amounts versus basing amounts on  retirement income needs. Like U.S. IRAs, Canada’s RRIFs are also subject to a minimum withdrawal schedule that increases with age. Retirees relying on the schedule for guidance could limit or see future income amounts reduced.

Finally, 62 year-olds represent the peak year of 9.6 million baby boomers in Canada (and the greatest years of nest egg risk are between the ages of 58-66) Should they retire and de-risk en masse, Canadian equity markets will likely undergo increased downward pressure and volatility. Retirees should consider re-balancing or “annuitizing” while markets are fully valued and  prior to an increase in capital gains or interest rates.

NOTE: This blog first appeared in the October 2021 edition of the Capital Partner


the BiGGEST Retirement Risk

This past week, I viewed a webinar presentation by Tom Hegna . Mr Hegna is an economist, a “retirement expert” and author of Pay Cheques and Play Cheques and other retirement books.

During his presentation, Mr. Hegna highlighted 10 different risks unique to “retiremenThis past week, I viewed a webinar presentation by Tom Hegna . Mr Hegna is an economist, a “retirement expert” and author of Pay Cheques and Play Chequesand other retirement books.

During his presentation, Mr. Hegna highlighted 10 different risks unique to “retirement.” They included:

  1. Longevity Risk – the risk of outliving your money
  2. Deflation – the risk that goods and services might decline (like during the Depression)
  3. Market Risk – the chance of a sustained bear market
  4. Withdraw Rate Risk – the risk of drawing down too much from your nest egg
  5. Sequence of Returns – risk of a permanent capital loss by drawing funds in a down market
  6. Regulatory Risk – a change or failure in regulatory framework (governance, Madoff)
  7. Taxation Risk – a hike in current rates or the imposition of new unforeseen taxes
  8. Inflation – an across the board increase in the cost of needed goods and services
  9. Long Term Care – the risk that a senior will require years of costly palliative care
  10. Mortality – the risk of a premature death

Of all the risks he highlighted, “longevity risk” was the most critical. It’s what he called the “Retirement Risk Multiplier.” IF that risk was not addressed first, the other risks could easily become more acute.

Life expectancy is a bit of a moving target and a tough concept for most. Most people see that life expectancy is around 84 for males and around 87 for females. What people miss is that notion that these numbers represent “averages.” They shouldn’t necessarily be used for planning purposes.

There’s a 50/50 chance (i.e. 1 in 2) that one member of a 65 year old couple will live to age 92 and a 25% (i.e. 1 in 4) that one member will live to age 97.

Hegna also noted, of all the risks retirees are exposed to, longevity risk is the easiest to take “off the table.” He advises retirees to calculate their basic human needs (food, clothing, shelter, utilities, etc.), see how much is covered by CCP and OAS and to top up income with an annuity – which guarantees retirees will never run out of income nor ever take a cut in pay (recent rates can be viewed here: https://think-income.com/annuity-info/ ).

Finally, Hegna noted how most brokers and financial planners run “Monte Carlo” analysis as a means of measuring and managing “risk.” Yet, their proposals always have a  disclaimer on the bottom of the page their retirement illustrations that reads, “63% of plans fail to provide income at or after age 90.”


4% Retirement Rule Now Obsolete

For years, financial professionals have suggested retirees draw 4% from their nest egg as a means of drawing sustainable income. That plan – designed by Financial Planner Bill Bengen in 1994, typically included allocating 60% into equities for long term growth and 40% into cash and fixed income as a means of dampening market volatility.

In theory, a senior with $250,000 of retirement savings would allocate $150,000 into equities for long term growth and $100,000 into cash and bonds. Then, they would draw $10,000 /year (or $833 /month) from the cash portion and re-balance the portfolio annually.

That plan is now being challenged by… the individual who first advocated the 4% rule.

In a recent Wall Street Journal article, Bill Bengen suggests retirees cut spending and exercise caution with the latest surge in inflation. He suggests adherents to the 4% rule take a pay cut and roll back their drawdown rate to 3%.  (See: https://www.wsj.com/articles/cut-your-retirement-spending-now-says-creator-of-the-4-rule-11650327097?st=gmubxx8uvq6aakz&reflink=desktopwebshare_permalink )

The problem is that there’s no precedent for today’s conditions,” he said.

A recent Morningstar report recommended a 3.3% initial withdrawal rate for those retiring today. It suggested that was an optimal rate for those who want spending to keep pace with inflation over three decades and want a high degree of certainty their money will last.

As of March 1st, Canadians had $2 trillion invested in mutual funds. Roughly 1/2 of those funds were invested in balanced funds, 1/3 were invested in equities and 1/8 were invested in fixed income/bond funds. Old ways of thinking still permeate retirement income strategies and expose Canadians to

Any retirement income strategy ought to include the use of annuities. Retirees receive higher, tax favoured income and retirees can rest assured they will never have to take a pay cut. Recent rates were posted here: https://think-income.com/annuity-info/