I don’t read a lot of personal finance books. At one time, I did, but eventually it seemed like I had read them all before. There are only so many ways to save money and perfect your asset allocation.
When I heard about Pensionize Your Nest Egg, I got excited about a financial book for the first time in a long time. The book promises to educate the reader on how to use product allocation, namely annuities to pensionize your nest egg – or in other words, create your own guaranteed income stream for life.
Most workers in Canada do not have a guaranteed pension when they retire. Most of us look longingly at government workers and their gold-plated pensions as we get closer to our own retirements. Most Canadians will retire using funds from CPP, OAS and likely funds from RRSP, TFSA and eventually RRIF accounts.
There are a number of risks associated with living off a portfolio of mostly stocks, bonds, mutual funds and ETFs. Poor investment performance would be one significant risk. What if you have some bad returns early on in your retirement and run out of money? Annuities are one way to buy a “government pension”. I’ve been learning a lot about annuities over the past year, and I have to say that they will form part of my retirement plan.
My biggest fear with respect to managing an investment portfolio is that one day, I might not be able to do it. There will come a time when I would rather trade the potential upside and independence of a personally managed portfolio for a guaranteed income stream.
This book shows you how to do it.
What is in the book
The book starts off explaining the risks of having a non-pensionized retirement plan.
Later, the idea of using annuities to pensionize some or all of your retirement income is introduced. There is also a brief section on guaranteed lifetime withdrawal benefit (GLWB) products. Annuities, GLWBs and regular investments are said to form the three silos of your pensionized retirement income.
The last section of the book involves the seven steps of pensionization. Some of these steps are normal retirement planning steps – estimating retirement income, calculating government pension income. Other steps are brand new and involve figuring out how much of your portfolio you should convert to annuities to meet your retirement goals.
Who should read this book
I would recommend the book for anyone who is interested in their finances. However, it will be most useful for individuals who are close to or in retirement since they will be in a position to act on the planning outlined in the book. While the authors made enormous efforts to make the information accessible to average Canadians, the reality is that this is not a simple subject. I suspect that someone who doesn’t know much about investing will have a hard time with this book.
What I liked
- The book is very useful and I don’t know of any similar books on the market. That could change if I decide to write a retirement planning book. 😉
- The writers are not dogmatic in their pensionization. They explain how to assess your current retirement plan and suggest a variety of actions which include not making any changes at all. There is a lot of leeway in terms of your retirement goals – you can follow some of their method or all of it.
- Does a great job of explaining how annuities work.
What I didn’t like
- The book deals more with the theory of pensionization, than the actual practice. This is exactly what the authors promise, so it’s not a complaint about the book, but rather a suggestion for perhaps a followup book.
- One of the “silos” is made up of GLWB products which are very expensive. The book explains that this silo is a hybrid of the other two silos, but I’m not sure why they didn’t just use the two silos of annuities and regular investment products. Canadian Capitalist had similar thoughts.
- One of the planning steps involves figuring out your legacy – or how much you want to leave the kids. This is a valid calculation, but I would question how many non-rich Canadians will worry about how much to leave the kids, when they are worrying about how much they will have to live on. My legacy plan is to leave the house for the kids.
Conclusion
A very good book. Two thumbs up!
Stay tuned to the blog – on Wednesday, I’ll be announcing a Pensionize Your Nest Egg book giveaway! It will be a quick contest with the winners being announced on Friday.
10 replies on “Pensionize Your Nest Egg Book Review – Milevsky and Macqueen”
Thanks for the mention Mike. Alexandra explained that it’s not their intention to say investors should allocate their nest egg across the three product silos. Rather it is to get investors thinking about all of them.
Alexandra Macqueen leaves some wicked smart comments on Canadian Money Forum, I keep thinking I need to check this book out…
@CC – Be that as it may, they did make the guaranteed income products one of the three silos, which in my opinion is a reasonably strong endorsement.
@Mr. Cheap – It’s a pretty good book. You can borrow my copy if you wish.
Cute baby! and thanks for the review.
Here’s the low-down on why we would include GLWBs (or whatever clunky acronym you would like to use) in the book:
The primary reason is that those products exist, and they are designed to respond to or protect against some of the new risks retirees face as they start to draw income from their portfolio. A book which did *not* describe these products would be incomplete.
But the next most important reason is that these hybrid products occupy a “middle space” between the non-guaranteed silo (typically RRSPs) and annuities. Annuities have a tremendous, unavoidable cost – liquidity. For someone who is NOT comfortable leaving their nest egg exposed to market risk and wants a lifetime income guarantee, but who is also NOT comfortable making an irreversible decision to hand over their financial assets to an insurance company, GLWBs provide a “middle path.” The annuity market is very, very small and it is a “puzzle” to economists why more people do not annuitize more assets.
GLWBs are intended to provide “the best of both worlds” – at a cost. However, the main portion of this cost is for the kinds of mutual funds that are included in these products – the actual lifetime income benefit guarantee cost is relatively modest at about 125 bps per year.
Hopefully, in future, these guarantees will be available on low-cost, passive portfolios. There’s also the idea of a “ruin-contingent lifetime annuity” – in which the portfolio insurance (i.e., the lifetime annuity) is purchased *without* purchasing asset management. I expect to see lots of innovation in this market in the coming decades, with GLWBs just the first major step.
I like the book and will revisit it as I get closer to retirement but I can’t help but notice the following…
Anyone else believe that this website takes away from the objectivity of the book?
http://www.retirementsolutionscentre.ca/en/product-allocation/intro.html
@Alexandra – Thanks, that’s my daughter from a couple of years ago. 🙂
I agree that the GLWB products definitely have room to get cheaper. Hopefully that will happen by the time I retire…
@Greg – I honestly think the book is pretty objective. I also think it makes sense that someone who writes a book about something might also work in that field in some capacity. They are the experts after all.
Alexandra
I had a question about GLWBs in a blog post I did on your book a few weeks back and I’d be interested in hearing your thoughts. In a nutshell, my concern is the risk that the GLWB one agrees to buy from the insurance company ends up costing more and/or delivering fewer benefits than what was originally agreed upon.
Cases in point where this has happened before with insurance products are the class-action lawsuits over vanishing-premium life-insurance polices, and the dramatic hikes to premiums that universal life-insurance policy holders now face (see the post in Million Dollar Journey blog). As for me, there was a personal experience of buying a seg fund (which has similarities to GLWB) in the late 1990s, only to have the fees jacked up two years later (after regulators determined the insurer had underprovided for reserves).
Considering ManuLife was hit hard by their failure to hedge the market risk behind their GLWB offering and regulators are now reviewing GLWBs for possible hikes to their reserve requirements, is there a danger GLWBs could end up being another insurance product where the customers get reduced benefits and/or higher cost after they sign the contract?
@Larry – the book discusses the issue of counterparty risk and is careful to say that ONLY government-backed pensions are “true” pensions. (See Chapter 1 – “When is a pension not a pension?”). So, yes, GLWBs and other non-government-backed promises are subject to counterparty risk, and they should not be related to as completely free of risk.
As for the specific question, we give the example of Con Life (on page 85) of a major insurance company that went under, but no annuity-holders were penalized (all obligations were transferred to solvent companies).
So: short answer – are GLWBs subject to counterparty and other risk? Yes. Is this something potential purchasers should be aware of and take into account in their purchase considerations? Yes.
Prudent purchasers will evaluate all potential risks to their retirement income strategies – part of the reason we went with the “nest egg” metaphor was to communicate the maxim “don’t put all of your nest eggs in one basket”. Different products and different silos protect against different risks and are subject to different forms of risk.
Why I would be interested in this book? Well, I am very interested in personal finance. Although I don’t have a lot right now, I feel that I should learn as much as I can so that I have a strategy in place when I do have enough money saved up.
Also, I don’t currently have a pension and learning how to “Pensionize” my nest egg would really be a valuable asset to have. Basically, its either I learn from this book or work for the government and you don’t want me working for the government.
This sounds like an interesting book. I’m not all that knowledgeable on annuities, although I did read Milevsky’s other book (Are You a Stock or a Bond?) and found it helpful. (I’m a stock, but I wish I was a bond. ;))