Pension expert Vettese warns that fixed-income retirement is challenging; stocks can be risky

In a recent interview with the Globe and Mail, pension expert, actuary and financial writer Fred Vettese has a few words of caution for those of us who like to avoid the risks of the markets by finding safe harbour in the world of fixed income.

Vettese has written a number of books on the subject of retirement planning; Save with SPP reviewed his book The Essential Retirement Guide and found it packed with great advice.

He tells the Globe that due to the economic uncertainty the pandemic has brought, “if you have enough assets now and can live with a less risky portfolio to achieve your lifestyle, then do it.” His message, the article notes, is specifically directed at those age 65 plus.

Noting that interest rates are the lowest they’ve ever been, Vettese states in the article that “we can’t say that we’ll put some money in bonds and it will stabilize the overall portfolio and we’ll still get a pretty good return. COVID has pretty much squeezed out any kind of risk-free income.”

So, he warns, “if you’re going to keep risk-free investments in your portfolio like bonds and guaranteed investment certificates (GICs), then you’re going to have to find a rational way to actually draw down the principal over your lifetime. You can’t live off interest from bonds and GICs.”

This last statement is a bit of a gobsmacker for those of us who have ardently believed in a balanced, bond/equity view of retirement saving! But he’s right, of course – bond yields, as he points out in the article, will deliver negative returns over the long haul at today’s interest rates.

What’s a retirement saver to do?

If you’re looking to replace the income that bonds used to provide you with high-dividend stocks, be careful, Vettese advises.

“Implicit in holding dividend stocks is the idea that those stocks are not going to suffer capital losses, that they’re not going to go down 20 or 30 per cent. And what if these companies start struggling and can’t keep up their earnings and have to cut their dividends? There’s a lot of risk in dividend stocks, even if we haven’t seen that risk showing its teeth yet,” he states in the Globe article.

Vettese says it is a tough time for savers – especially young ones – to try and invest on their own. He suggests that they get professional advice, and says most people would be better off in a low-cost market-based exchange traded fund (ETF) than they would be if they picked their own stocks. He’s also a proponent of waiting until age 70 to start your government retirement benefits, such as the Canada Pension Plan and Old Age Security, because you get quite a bit more income each month that way.

There’s a lot of great stuff to recap here. Fixed-income isn’t the solid pillar it once was, at least for now, and stocks paying high dividends can be risky. Advice with retirement saving is well worth it, and delaying your government benefits as long as you can will give you a bigger monthly payout.

There’s no question that investing all by yourself can be risky. You might be paying fees that are too high. You could pick a category that isn’t going up in value – or risky stocks that don’t pan out. If you’re not really ready to go it alone in the euchre hand of retirement investing, the Saskatchewan Pension Plan could be an option for you. SPP looks after the tricky investing part for you, at a very low cost, usually less than 100 basis points. Why not check out SPP today.

Join the Wealthcare Revolution – follow SPP on Facebook!

In The Essential Retirement Guide, noted actuary and financial writer Frederick Vettese offers a different, and decidedly non-alarmist approach to funding one’s golden years.

The book challenges some of the accepted “truths” about retirement planning, such as the possibility we will all live past 100 and that we should save (via all sources) enough money to replace 70 per cent of our pre-retirement income.

On longevity, Vettese notes that “the average person has little better than a 50-50 chance of making it from age 50 to 70 without dying or incurring a critical illness.” The book provides some interesting advice on how to determine your own, more realistic life expectancy target.

As for the 70 per cent target, Vettese produces ample evidence showing many of us can have a well-funded retirement with a much lower target. The income replacement target, he writes, can be “as low as 35 per cent for a couple that spent a considerable amount on housing and child-raising through their working years. The target can nudge above 50 per cent for a middle-income couple who paid off their mortgage earlier and then started to spend much more on themselves during their last few years of employment.”

Why does he feel you need less? He cites research showing that spending drops more than 50 per cent on many items – airline fares, admission fees, alcohol, cigarettes, clothing – once we reach age 80. And while many of us assume we will at some point face expensive long-term care costs, Vettese writes that “the probability of requiring long-term care is about 50 per cent for women and 40 per cent for men,” and it is unlikely that such care will be required for more than five years.

Other advice from Vettese includes paying attention to investment management fees. “Unless the firm that is managing your monies (if you have one) can demonstrate that they consistently achieve higher returns than the benchmark indices, you should expect your own returns will just match the benchmarks, less whatever fees you are paying.” Exchange-traded-funds have very low fees of 0.25 per cent, versus fees of up to three per cent for “some high-cost equity mutual funds,” he warns.

Vettese likes annuities as part of a retirement plan. “Buying an annuity is usually a better bet than managing your own investment portfolio after retirement and drawing an income from it,” he writes. “You lose a little upside potential but you also eliminate some major risks.” He suggests that people with a portfolio of fixed income and equity assets consider converting the fixed income portion to an annuity, which provides them with a set amount of income monthly for as long as they live.

Access to a workplace pension is a plus for those that have it, he notes. “Participating in almost any workplace pension plan is a good thing,” he writes. Nearly every kind of workplace savings arrangement is a group product, which gives individuals access to low-fee investments, Vettese notes. That leaves more money for retirement income, he writes.

Vettese provides a nice six-point retirement strategy, as follows:

• “Save 10 per cent of your pay each year.
• Invest it in low-cost pooled funds, weighted towards equities.
• Keep the asset mix the same, through good times and bad.
• Apart from the mortgage on your home, avoid going into debt.
• Pay off your mortgage by the time you retire.
• Buy a life annuity at retirement.”

This is a good reference book for anyone wanting to fine-tune (or develop) a retirement plan and it has been written to work with both Canadian and American audiences, a somewhat rare feat.

The Saskatchewan Pension Plan provides some of the tools you may need for your retirement plan, such as low-cost, professional investing in a pooled fund, and the ability to convert some or all of your savings to an annuity at retirement. Check it out today.

Written by Martin Biefer
	Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock. He and his wife live with their Shelties, Duncan and Phoebe, and cat, Toobins. You can follow him on Twitter – his handle is @AveryKerr22