Book Review: The Essential Retirement Guide: A Contrarian’s Perspective.

Book Review: The Essential Retirement Guide: A Contrarian’s Perspective. 2016. By Frederick Vettese. Wiley Books, wileyfinance.com. 270 pages.

Illness, incapacity and death loom large in Frederick Vetteses’s book on retirement, yet he strikes a humane and optimistic tone by focusing on the things we can control to enhance our financial security and reduce our anxieties about growing old. Saving for retirement is a process of deferred consumption and Vettese’s goal is to show how to avoid financial stress both while working and in retirement by smoothing out consumption across both periods. Frederick Vettese is the Chief Actuary at Morneau Shepell, and has spent his career providing retirement consulting and has written and spoken extensively on the topic. He previously co-authored with Bill Morneau¹, The Real Retirement Guide: Why You Could Be Better Off Than You Think, and How to Make That Happen.

The subtitle of this book is ”A Contrarian’s Perspective” and he leans against financial orthodoxy in two key regards:

Canadians need less than the oft-quoted 70% of pre-retirement income in retirement to maintain their standard of living: 50% is a more realistic estimate for homeowners
Retirees can withdraw more than the commonly accepted 4% rule without prematurely exhausting their savings. He suggests 5% or more, depending on circumstances.

Both are good news that counterbalance two other retirement trends:

Canadians are living longer, so retirement assets have to last longer
Future investment returns are likely to be lower than recent historical returns.

The book is written to be of value to both individual investors and investment practitioners. Individual investors will appreciate the methodical and evidence based approach to establishing a realistic retirement income target (retirement income as a percentage of final employment income) and how much wealth needs to be accumulated at retirement to deliver this income. In particular, Vettese notes the double impact of savings. Higher savings reduces the retirement income target because people who are saving more, necessarily have a lower consumption. Higher savings also means a higher retirement income. Thus relatively small changes to savings rate over a sustained period can have a big impact on retirement income. This discussion is an update to the earlier work in the Real Retirement Guide.

Many people are concerned about how to price the risk of needing long term care (LTC) at some point in retirement. Vettese assesses both how frequent long term care needs are and the typical duration. He then reviews long term care insurance, how it works, its cost, and effectiveness at matching actual needs. His conclusion is that LTC insurance is not worthwhile for most people. Some of the shortfalls include: high premiums relative to benefits, the long term commitment without any ability to switch insurance providers, and no guarantee that premiums won’t increase. As Vettese points out, this is not necessarily a case of the insurers making excess profits; many companies have chosen to exit the business. Vettese concludes with some estimates of the cost of self-insuring.

A chapter on factors that control life expectancy should be read by retirees and practitioners alike. Exercise and diet have significant and quantifiable impacts on longevity. I followed Vettese’s advice and went to projectbiglife.ca to see how to improve my own life expectancy and I recommend the site to readers. The author also gently reminds us that actuaries are also human as he describes some of his own signs of aging.

For investment practitioners, who in my opinion do not pay as much attention to the effective depletion of client’s assets as they do in the accumulation phase, there is a useful discussion of spending patterns in retirement and a re-statement of the case for annuities. Annuities are the only commercially available product that deals directly with the risk of outliving your money. But Vettese is realistic, and acknowledges that many people, including himself, can’t overcome their reluctance to transfer irrevocably a significant proportion of their life savings to an insurance company. For those who don’t like annuities, there is not discussion of other options, such as dynamic spending rules, as a way of managing longevity risk without actually owning an annuity.

It is tempting to include some of Vettese’s conclusions about the wealth targets for different levels of retirement income but to do so might discourage potential readers of his book. That would be a pity because following his arguments to his conclusions are as important as the conclusions themselves. This book should be read by those who want to plan their retirement, rather than just let it happen. For those who are not of a planning disposition, consider getting someone else to read it on your behalf.

¹ Currently Canada’s Minister for Finance