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The Essential Retirement Guide: A Contrarian's Perspective



"Anyone interested in retirement planning—amateur and professional alike—will benefit from this book. The advice is original, thoughtful, and objective. The ideas are well organized and clearly expressed. In a field long dominated by numbers and myths, this is as close as we get to wisdom."
—Malcolm Hamilton, Retired Actuary and Senior Fellow, C.D. Howe Institute

"Fred Vettese's new book starts out by showing how traditional retirement finance 'rules' such as the 70% income replacement target and the 4% post-work drawdown rate are riddled with conceptual holes. One by one, he replaces them with his own planning, saving, and investing rules that combine his professional experience as a top actuary, common sense, and empathy for the reader. A truly valuable retirement guide."
—Keith Ambachtsheer, Director Emeritus, International Centre for Pension Management, Rotman School of Management, University of Toronto

"Retirement demystified. Smart, clear, persuasive, and reassuring."
—Rob Carrick, personal finance columnist, The Globe and Mail

"Vettese does an excellent job of dispelling some of the financial myths about retirement, giving us all hope that despite our habit of overspending, we won't outlive our money."
—Bart Astor, author of the bestseller AARP Roadmap for the Rest of Your Life

"Fred Vettese is a leading pension and retirement expert. His latest book, The Essential Retirement Guide, is an important addition to the retirement reading list. Fred provides an appealing mixture of hard numbers and philosophical reflection to rebut many elements of conventional retirement advice. Of particular note, he presents well-supported and convincing arguments that most people need far less income in retirement than the financial industry would usually have you believe. He also delves deeply into how to financially cover your potential long-term care needs and provides a critical and persuasive assessment of the value of long-term care insurance."
—David Aston, retirement feature writer, MoneySense Magazine

"Fred Vettese's book is an excellent guide for both long-term planners and latecomers to retirement planning. He takes his readers beyond individual anecdotes and broad averages and gives them the tools to think sensibly about their own prospects and situations. Informative, insightful, and often witty, this book will be useful to people just starting to plan, and to those who are further along and want a fresh view of where they are trying to go and how they can get there."
—Bill Robson, President and CEO, C.D. Howe Institute

"Thorough, approachable, and authoritative, Vettese has rewritten the book on retirement finances."
—Angela Hickman, Personal Finance Editor, Financial Post

FREDERICK VETTESE is the Chief Actuary of Morneau Shepell, one of the largest human resources consulting and technology companies and one of the top five defined benefit pension plan providers in North America. Fred has spent his entire career providing retirement consulting and actuarial services in respect of workplace pension plans. Much of his professional time these days is spent in the public eye, speaking at professional conferences and writing on retirement issues for the national newspapers and other media. In his spare time, Fred struggles enthusiastically with both his golf game and his piano. He was born and raised in Toronto, Canada, where he continues to reside with his wife Michelle.

The Essential Retirement Guide is Fred's second book. In 2012, Bill Morneau and Fred co-authored The Real Retirement, a book that explained why Canada was not suffering a retirement crisis. Fred can be reached at

Preface xiii

Acknowledgments xvii

PART I The Retirement Income Target

Chapter 1 The Road to Retirement 3

Detours 6

Chapter 2 Doubts about the 70 Percent Retirement Income Target 9

Niggling Doubts 10

Saving for Retirement Is a Two-Dimensional Problem 14

The Macro Case Against 70 Percent 15

Low-Income Workers 16

Conclusions 16

Chapter 3 Homing in on the Real Target 19

Setting the Ground Rules 19

Howard and Barb 21

Steve and Ashley 1.0 23

Steve and Ashley 2.0 27

Expressing Consumption in Dollars 29

Conclusions 30

Chapter 4 A New Rule of Thumb 33

Guiding Principles 34

Retirement Income Targets under Different Scenarios 35

General Rule of Thumb 38

Conclusions 40

PART II The Wealth Target

Chapter 5 Quantifying Your Wealth Target 43

A Rough-and-Ready Estimate 43

A More Actuarial Approach 46

Chapter 6 Why Interest Rates Will Stay Low (And Why You Should Care) 53

The Rise of the Savers 54

The Japan Experience 57

Applicability to the United States and Canada 58

Possible Remedies 59

Implications 61

Chapter 7 How Spending Decreases with Age 65

Doubts 66

Quantifying the Decline in Consumption 68

Why Does Consumption Decline? 72

Next Steps 73

Chapter 8 Death Takes a Holiday 75

Present-Day Life Expectancy 77

Dispersion of Deaths 78

Who Is Benefiting the Most? 79

Why Is Mortality Improving? 80

The Future 82

Conclusions 85

Chapter 9 Estimating Your Own Life Expectancy 87

Conclusions 93

Chapter 10 Is Long-Term Care in Your Future? 95

Long-Term Care (LTC) 95

What Does LTC Entail? 96

What Are the Chances You Will Need LTC? 99

How Long Is LTC Usually Required? 101

Conclusions 102

Chapter 11 Paying for Long-Term Care 103

Typical LTC Insurance Contract 103

Does the Math Work? 105

The Verdict 108

The Consequences of Not Insuring LTC 112

Chapter 12 Putting It All Together 115

New Wealth Targets 120

Buffers 122

Conclusion 123

PART III The Accumulation Phase

Chapter 13 Picking a Savings Rate 127

Historical Performance 127

Lessons Learned 129

What the Future Holds 131

Generalizing the Results 133

Chapter 14 Optimizing Your Savings Strategy 137

The Goal 138

Strategy 1: Simple 138

Strategy 2: Simple Lifecycle Approach 139

Strategy 3: Modified Lifecycle 140

Strategy 4: Variable Contribution 141

Strategy 5: The SMART Approach 142

Conclusion 143

The Third Lever 144

Methodology 144

Chapter 15 A Gentler Approach to Saving 147

Path 1: Pain Now, Gain Later 148

Path 2: Smooth and Steady Improvement 150

A Comparison in Dollar Terms 153

Conclusions 154

PART IV The Decumulation Phase

Chapter 16 Rational Roulette 159

Call to Action 161

Watch Out for Your Children 163

Chapter 17 Revisiting the 4 Percent Rule 167

The 4 Percent Rule 167

Problems with the 4 Percent Rule 169

A More Rational Spending Rule 173

A Monte Carlo Simulation 176

Conclusions 177

Chapter 18 Why People Hate Annuities (But Should Still Buy One) 179

Why Annuities Should Be Popular 180

The Psychology Behind the Unpopularity 183

Tontines 184

The Insured Annuity Strategy 185

Indexed Annuities? Forget It 188

Conclusions 189

PART V Random Reflections

Chapter 19 How Workplace Pension Plans Fit In 195

Why Employers Offer Workplace Plans 196

Getting the Most out of Your Workplace Plan 198

How a Workplace Pension Plan Affects Your Dollar Target 202

Online Forecast Tools 203

Chapter 20 Bubble Trouble 205

Why Worry about Financial Bubbles? 206

Examples of Recent Financial Bubbles 207

Common Characteristics 211

The Everything Bubble 212

Chapter 21 Carpe Diem 215

The Numbers 217

Healthy Life Years 219

Trends 221

Personal Genome Testing 222

Chapter 22 A Life Well Lived 225

Retirement and Happiness 225

Final Thoughts 229

Appendix A Similarities between the United States and Canada 231

Social Security Programs 232

High-Level Comparison of Retirement Vehicles 235

A Tax Comparison 238

Appendix B Social Security in the United States and Canada 241

Name of Social Security Pension Plan 241

Purpose of Social Security 241

Earnings Base for Pension Calculation 242

How Pension Is Calculated 243

How the Plans Are Funded 243

Normal Retirement Age 244

Early Retirement Age 244

Delayed Retirement 245

Indexation 245

Other Government-Sponsored Pension Plans 245

Taxability 246

Appendix CRetirement Income Targets under Other Scenarios 249

Appendix D About the Assumptions Used in the Book 255

Thoughts on Conservatism 255

Assumptions Used to Estimate Personal Consumption 256

Assumptions Used to Calculate Future Retirement Savings 258

Assumptions Used to Estimate the Historical Accumulation of Savings 260

Couple Contemplating Long-Term Care Insurance 260

Assets Needed to Cover Long-Term Care (LTC) 262

About the Author 263

Index 265