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The New Retirement Book Review and Discussion



Similar to the annual customer appreciation event with TD, my father attended the local BMO Nesbitt burns event a little while ago.  The showstopper of the event was a talk given by Sherry Cooper, the BMO Nesbitt Burns chief economist.

At the end of the event, Ms. Cooper gave away her newest book “The New Retirement” which my father happened to pick up an extra copy for myself.  At first glance, I assumed that this book would be another book about retirement which didn’t interest me too much.  Despite that, I decided to flip through the book to see what insights Sherry Cooper had to share.

I’m glad I gave the book a chance because it’s one of the better books that I’ve read that explains preparing for retirement.

Who is Sherry Cooper?

Cooper is a M.A and Ph.D in economics from the University of Pittsburgh.  After 5 years as an economist at the Federal Reserve board in Washington, D.C, she joined the Federal National Mortgage Association (Fannie Mae) as Director of Financial Economics.  Since 1983, she has been the chief economist of BMO Nesbitt Burns.

Needless to say, she knows her stuff!

About the Book

I’ve written about early retirement before and even about the safe 4% withdrawal rule before which this book touches on.  The difference being, these concepts are explained by an seasoned veteran who explains the concepts in an easy to understand manner.

The first half of the book explains the baby boomer generation and how retirement is shifting from a deadline to a “transitional retirement”.  That is, Canadians are deciding to work part time on enjoyable projects even in their retirement.

The second half, which I’ll get into more detail below, gets into the numbers.  Maximum withdrawal amounts, the amount you should have saved etc.  As you may have guessed, the second half was my favorite part of the book.

Key Points for Discussion

Without giving away too much about the book, here are some key points that she has concluded:

  • Safe Portfolio Withdrawal Rule: 4-5% retirement withdrawal rule for 30 years of retirement assuming an average of 5% equity returns after inflation.
  • Retirement Portfolio Asset Allocation: 50% stock/50% bond asset allocation to achieve the above withdrawal rate.
  • Savings Rate Required: 15% savings rate is the new 10%.  Everyone has heard of the 10% savings rule popularized by “The Wealthy Barber“.  Sherry Cooper has come to the conclusion that these days 15% savings of gross income is required for a comfortable retirement whereas the old 10% results in people working longer than expected.
  • CPP is safe.. for now: Sherry Cooper shows her research and calculations that show how long CPP should last. From the date of her publishing, CPP is good for 75 years. It’s hard to say how long Old Age Security (OAS) and Guaranteed Income Supplement (GIS) will last as it is paid out of the current tax base.

Conclusions

Even though this book was targetted towards to baby boomer generation, there is a lot of information provided in this book that applies for anyone thinking or planning for retirement.  I highly recommend this book as Sherry Cooper has done a great job in explaning the various financial issues around retirement.





21 Comments, Comment or Ping

  1. I always like reading about new books on retirement. I also liked your review. I will be waiting for the book giveaway, if you are going to create one.

    One type of book that hasn’t gained much popularity is investing for retirement income. People buy stocks,bonds, real estate, gold and other stuff while only hoping to sell their investments when they appreciate. Few if any ever seem to wonder what would happen if stocks/bonds/real estate/gold and the rest spend the next 2-3 decades stuck in a channel. The only positive in this scenario will be the dividend/interest/rental income.

  2. Sign me in for a copy. ;-) cheers.

  3. I find it interesting that everyone worries about CPP but since the reform in the 90′s, CPP has performed better than most private pension plans and is better funded. Yes, it won’t last forever but it will not be a financial blackhole.

    Shouldn’t we be worried about how the private pension plans are severly underfunded and get off riding CPP? They seemed to have brought their house in order.

    Another crazy myth spouted by the financial industry.

  4. 4. mike k

    If you need to save 15%, up it to 18% and make it the RRSP limit.

  5. Sorry folks, no free copy of this book to giveaway this time!

    TMW, I agree, I think CPP is relatively sound, but I also believe that OAS has a real risk of being reduced in the future due to demographics. More retired seniors along with a smaller tax base spells trouble for OAS.

  6. 6. Hazy

    I just read an article about CPP…….sounds like it is in pretty good shape.

    article link

    I am expecting the retirement age to be raised at some point.
    I think that the clawbacks for OAS could be adjusted as well.
    That 66k income requirement for clawbacks to start seems a little on the high side to me.

  7. The CPP is in fine shape. The OAS will have to be straightened out as well. Too many people rely on this for their income. The Gov’t has an obligation to pay the people that allow the gov’t to exist in the first place. I don’t see too many politicians and gov’t employees forming bread lines these days, and I don’t expect to in the future either. The gov’t would be wise to pay what is intended to be paid.
    And yes, the future of CPP and OAS benefits in question was none other than the mutual fund industry’s version of a “selling tool”.

  8. 8. XEGTrader

    Nice site – I was googling the MoneyTalk show after receiving a TD invite. The event will be taking place at the National Gallery here in Ottawa.

    As for retirement savings, it’s unfortunate that data suggests that most Canadians are not saving as they should for retirement. For instance, the average RRSP contribution for 2007 was $6,000, and the average RRSP value for those over 55 was $102,000.

    Many are relying on the value of their home to help fund their retirement. This is a mistake for several reasons, but the most compelling is that home prices have peaked, are expected to fall in the short term, and will appreciate little over the next 5-10 years due to a number of factors including household deleveraging and tightening lending standards at Canadian banks.

    We have seen 30 years of tremendous growth on the back of a debt bubble that has finally been pricked and will cause a tremendous amount of financial stress for years to come.

    My 2 cents to those looking to retire in comfort is:

    1. Get out of real estate (excluding the home you live in).
    2. Adjust your living standard such that you can save 25% of take-home pay.
    3. Top up the RRSP and the TFSA every year.
    4. Wait for earnings to improve before allocating further capital to the broader stock market. For now, consider short-term bonds and inflation-indexed bonds.
    5. In the short term, invest only in sectors that are not highly leveraged (ie. agriculture, oil & gas). These sectors have seen a lot of red lately and are beginning to look attractive. They also pay reasonable dividends.

    I suspect this will be a long and painful deleveraging process that will take many years to sort out.

    One final thought. Over my 22 years of investing, I have come to realize that the financial industry is the worst threat to your financial health. I consider the entire brokerage industry to be a scam. Simply look at the forecasts offered up by this industry just one short year ago. I have no faith in full service brokers, or the research departments they rely on for their talking points. Do yourself a favour – read, read, read…and take control of your own investment plan.

    Caveat Emptor.

  9. 9. Andy

    I think that in “The Wealthy Barber”, Chilton states that people should still fill their RRSPs every year, and that the 10% savings was in addition to other retirement savings – to make you “filthy rich”.

    Unfortunately I lent my copy to someone so I can’t confirm that is what’s said, I’m sure someone else will be able to.

    XEG Trader – I am curious to know why you wouldn’t have any new investment money in indexed funds. What if, while I’m waiting for earnings to improve the market takes a huge jump at the beginning of a resurgence. If I’m in Bonds I’m not going to get any of that increase. What are people’s thoughts on this? This advice sounds like trying to time the market, which I’m not interested in attempting.

  10. 10. Ray

    Good review! I am not exactly concerned about retirement saving, but just wealth accumulation.
    My strategy is conservative dividend investing and real estate investing. Income/cashflow focused.

    I agree a little with XEGTrader about the research departments, back in June 2009 they were predicting oil at $200 and in Nov. $25 thats just one of the examples I dont really depend on them much either, I do a lot of my own research but still have to rely on some analyst research.

  11. Wise words XEGTrader. Everyone should review his post. You may risk losing a little of the market gain but if capital preservation is the goal, this is the way to go. It’s all about balance (allocation). I think it may be a while before markets recover so playing safe would do us all well, at least for now. And as said, stay away from the financial/mutual fund industries vultures as they circle about our fear in the markets. Notice now how they are pouring on the advertisements preying on people’s fears and ignorance? Gee, they rode our portfolios into the ground and now they want us to trust them AGAIN and let them “handle” what’s left of it?! Yeah, right………..
    Learn as much as you can (from websites such as this one) and stay the course! Happy investing!

  12. 12. Stan

    If my memory serves me right, the “10% fund” from the Wealthy Barber does not refer specifically to retirement savings. The idea is to put that money away to realize your dreams, such as a cottage, a boat or a mansion. Not exactly realistic for most people, but still interesting. I believe the author’s suggestion is to save that 10%, no matter what, PLUS save for retirement with additional funds. I don’t think Chilton suggests a retirement savings percentage, but more of a vague, “save as much as you can” approach. Whatever.

  13. 13. Gates VP

    Chilton’s book
    “But the ten percent fund is not intended to augment our retirement income.” (p. 104)

    “How should they save for their retirement…?… The answer is simple. They should save more than ten percent of their income. Not a lot more, but more… say, fifteen percent. On retirement, one-third of their ten percent fund should be used to augment their income. (p. 112)

    In the context above, “they” refers to the narrator’s co-workers who have pensions but have not started an RRSP. So Chilton’s advice (circa 1989) is to save 20% of all of your income even if you have a pension. In this case, the pension will provide for 65% of the narrator’s last working year of income (p. 102).

    If a 10% RRSP contribution covers 35% of your target income, then you would need at least 20% to cover the full 100% (but 20% is the current max). So based on Chilton’s math, everyone without a pensions (i.e.: most of us) should be saving the full 20% (or so) to their RRSP, plus maxing out the TFSA, plus saving 10% for their “ten percent fund”. That’s 30 to 40% of your pre-tax income in savings.

    Telling the average Canadian that they can be rich by saving 30%+ of their income is hardly noteworthy or even ingenious. Telling people that your investments averaged 12% when you lived through the 80s isn’t really much of an accomplishment. Government bonds averaged 10%+ from 1980 to 1984. With rates in the 9%+ range from 1976 to 1992 (source).

    The 4% rule
    FT: 4-5% retirement withdrawal rule for 30 years of retirement assuming an average of 5% equity returns after inflation.

    OK, this sounds a little odd.

    You’re supposed to earn inflation + 5% and then only withdraw 4-5%? So after retirement you’re supposed to be able to live off of your savings AND have the actual purchasing power of those savings increase? Why do you want to do that? I’m supposed to earn my “million dollars” and then never spend it? I’m just supposed to live off the interest and dividends?

    Huh?

    And who earns inflation + 5%?

    The US has a Treasury Bill that is inflation protected (TIPS). They’re currently paying 2% or less. The markets (Dow Jones, TSX) are in a 10-year bear market after adjusting for inflation. And you may have noticed that they’re not going anywhere.

    And that ignores the big question: how can all of us (not just some of us) earn inflation +5% over the long-term.

    @FT: thank you for the summary. It’s nice information. Saving 15% is probably a reasonable target.

    But all in all the whole things sounds like a lot of BS to me.

  14. Gates: Thanks for another thought provoking comment. I think the authors study was based on “historic” market returns and what they predict the average return is going to be moving forward. Do you think that a 5% (after inflation) return going forward averaged over the next 30 years is excessive?

  15. 15. Gates VP

    Hey @FT;
    Do you think that a 5% (after inflation) return going forward averaged over the next 30 years is excessive?

    I think that 5% post-inflation is a pretty darn big number.

    Here’s a chart for US TIPS over the last 5 years. So this is a guaranteed treasury that is paid at inflation + X%. That X has not exceeded 3.5% in the last 5 years.

    Here’s a similar chart going back to the 60s. This time for US treasury notes not inflation-protected. There are definitely some big numbers there, but overlay that with annualized inflation and things don’t look that great. I pulled inflation from here.

    Here’s a link to the overlaid chart with data.

    Follow the orange line. That line is the difference between prevalent rates and inflation. That’s our “inflation + X%” line.

    That line is rarely above 5% in the last 30 years. It has a median value of 2.7%. It even has some negative years (where buying a 10-year t-bill lost you purchasing power).

    Here’s a chart of the S&P 500 in a similar range. It seems like awesome growth over 30 years, but we’re not cutting away inflation. Plus, look at the peaks and valleys.

    Take a look at 1997 to 2009, just two big humps. If you had a million dollars in the S&P in 1997 and just “held”, you would still have a million dollars, but it’s pretty obvious that you’ve lost real purchasing power.

    At just under 3% per year in inflation, you’re down 30%+ in real purchasing power over that decade. But it’s worse than that, b/c you needed inflation + 5% over those years, right?

    To make inflation + 5%, you’re making 8% / year from 1997 to 2008. That means that your million dollars should undergo a 100%+ increase. If you (and everyone) are making “inflation+5″, then the million dollars you had in the market should now be two million dollars.

    But it’s not.

    And if you had invested it in government t-bills you also didn’t make inflation+5.

    You didn’t make inflation+5 from 1999 to early 2008, even at the peaks.

    So for over 10 years, we as a collective investment group have not been able to make “inflation+5″ in any of the majorly traded North American markets or using any of the commonly available investment tools. Yes, some investors made out well, but not we as a whole.

    So even if you take Sherry Cooper’s advice on the 50/50 split, where do you get inflation+5? The markets didn’t beat inflation, and “guaranteed” investments paid out way less than “5″.

    But here’s what’s more. If you were retired for the last 10 years, how are you going to make up for all of that lost income?

    How are you going to get “inflation+10″ so that you can “catch up”?

  16. Gates: Good argument. The only flaw that I can see if that you’re quoting only 10 years of market data. I would need to check the records, but during most 20 year periods, stocks have had better returns than fixed income (http://www.canadiancapitalist.com/2009/01/29/poor-10-year-stock-returns-is-not-unprecedented) and have beaten inflation.

  17. According to MoneyChimp:
    http://www.moneychimp.com/features/market_cagr.htm

    For the S&P500 (CAGR):
    1988 to 2008: 6.37%
    1987 to 2007: 8.97%
    1986 to 2006: 9.52%
    1975 to 1995: 11.01%
    1972 to 1992: 7.17%

  18. 18. Gates VP

    Hey FT;

    Thank you for the additional data. I’ve added it to the spreadsheets and overlaid the data here.

    So let’s take your 20-year numbers.

    It’s pretty obvious that 6.37% minus an average of 3.1% inflation is well below the target of inflation+5.

    The top quoted numbers from 1986 to 2006 provided about 6.5% over inflation. But only on the half of your portfolio. The other half earned about 3.5% for an average of inflation+5. So as long as you retired from 1986 to 2006 you were in good shape.

    Except 2006 was pretty clearly a “bubble” year. If you ride through from 1986 to 2008, your CAGR suddenly goes from 9.52% to 6.58% and now you’re back under inflation+5.

    1975 to 1995 seems great: 11.01%!!!
    But if you tried to retire just 3 years earlier 1972 to 1992 you’re suddenly hosed, you retire right into two really bad years for the markets (1973, 1974) and then you see inflation go absolutely crazy from 1974 to 1981.

    So if you catch the right date ranges and die at the right time, everything works like magic. But if you try to retire in 1972 (or 2008) using “the plan” listed above, then you’re not making “inflation+5″. Heck retire in 1970 or 1971 and you run into the same problem.

    And I believe that this is the fundamental problem with the retirement planning that we calculate and preach. We all talk about “not trying to time the markets”, but if you ever plan to retire, you have to time the markets at least once. What’s more, when you need to pull money from the account, you don’t always have the benefit of “averaging” out the years.

    Just take a look at the chart. Watch the big see-saw motions on the green line (S&P).

    Imagine that you had successfully saved for your retirement in any year since 1996 and start tracing through the roller-coaster. There are lots of years where retirement is, at the least, very poorly timed.

    Imagine you’re the lucky person who struck in rich with $2M in 1998. You plan to live off 4% which is 80k / year (circa 2001). You have the 50/50 allocation with a million in T-Bills and a million in the S&P. You make life easy and withdraw 40k from each at the end of the year.

    This simple plan leaves you with 1.2M left in the bank after only a decade. 0.778 in bonds, 0.414 in stocks. That’s after adjusting for inflation each year. (I can share the xls)

    Losing most of you nest egg in the first decade is clearly very divergent from Sherry Cooper’s plan. But it happened to everyone who retired in 1998 and followed the plan. Retirement in 1999 is even worse. Maybe if you had retired in 1995 you’d have been luckier.

    Yes, you could have avoided some of the losses by cashing out T-Bills instead of stocks (but that’s market timing, right?) And really, how long is that going to last? The markets just dropped 40%, what if they do nothing but go sideways for 6 years? Do you just keep pillaging the T-Bills? For how long? Every year you pull only from T-Bills means that you need a larger % growth from your stocks just keep cash flowing.

    So yes FT, I feel that the “inflation + 5%” averaged return going forward the next 30 years is quite unlikely. Yes, some smart (or lucky) investors will make it happen. But as a general populace, it is very unlikely to happen. In fact, it seems more likely to me that lots of people will pick the wrong time to retire and will fail the “Cooper plan”.

  19. 19. Jordan

    @Gates,

    Great comments, you are sharing very interesting arguments that you must have spent considerable time researching and thinking about. Knocking wholes in Cooper’s plan is good, but I wonder if you have an alternative idea for a retirement plan? Maybe you would write a post about it for MDJ to share and discuss?

  20. 20. Gates VP

    @Jordan:

    You know what, I’m going to share your challenge with my wife. I think it would make a good series of posts to analyze “retirement for generation Y” (& maybe X).

    I’ve definitely been brewing alternate solutions for many years, it may well be time to “publish”.

    Unfortunately, it’s probably a 5 or 10-parter. So maybe I’ll just post them to my own blog and share them with @FT as they progress. I would love to bring it back to this blog though :)

  21. 21. cannon_fodder

    Just saw on BNN that part of the reason for the surprising job numbers in Canada for April (added almost 40,000 jobs – yes, added!) were due to people 55 and older getting back into the workforce.

    In fact, while the very recent trend is probably due to a need (due to retirement funds being hit hard) there has been a steadier trend of increased employment in this demographic.

    Whether this is a result of people living more materially or balancing life/work in their pre-retirement years than previous generations or it is a case of people finding retiring early isn’t quite the enjoyable life they expected, I think it could have an important benefit.

    If these people are continuing to work, and adding to the tax coffers rather than drawing from them (e.g. CPP/OAS/GIS), then this should make the forecasted demise of OAS/GIS an event further off in the horizon.

    In many cases, these older workers are not standing in the way of the young graduates from getting jobs – they are self-employed.

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