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Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life Paperback – Aug 30 2010
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From the Back Cover
PensionizeTM Verb. 1. To convert money into income you can't outlive. 2. To create your own personal pension, a monthly income that lasts for the rest of your natural life.
With the subpar performance of the markets, record-high personal debt levels, and shockingly low savings rates, it's clear that many Canadians expecting to retire in the next decade simply don't have a sufficient nest egg to ensure a worry-free retirement. Making matters worse, only about one-third of Canadians currently belong to a formal, or registered, pension plan; and even a large number of that "lucky third" will not retire with a guaranteed pension income.
If you no longer have the time to wait and hope for your traditional investments to pay off, the answer is to "pensionize your nest egg" using the new technique of product allocation set out in this book. Pensionize Your Nest Egg explains how to
- Recognize if you really have a pension or just a tax-sheltered savings plan.
- Become informed about the new risks you and your nest egg face in retirement and why asset allocation, despite its value in the accumulation stage of life, is not sufficient to protect you and your money.
- Measure your retirement sustainability quotient (RSQ) and your Financial Legacy Value (FLV)—then choose a retirement income plan on the Retirement Income Frontier.
- Understand how product allocation differs from asset allocation, how to allocate your nest egg across three product silos, and learn about the new financial products that are available to protect against the new risks you face.
- Follow a seven-step process to close your Pension Income Gap and convert your retirement savings into a secure stream of lifetime income.
About the Author
MOSHE A. MILESKY, Ph.D., is an author, researcher and professor at York University in Toronto, Canada.
ALEXANDRA C. MACQUEEN is a Certified Financial Planner professional who works as a project manager at The QWeMA Group in Toronto, Canada.
Top customer reviews
The first section deals with pension basics such as defined benefit vs. defined contribution plans, the looming pension crisis, and the definition of pension. This section also deals with the major risks in securing retirement income: longevity risk, sequence of returns, and inflation. In defining pension (guaranteed, lifelong income stream), the authors ask a discomfiting, but necessary, question. If your employer/pension sponsor can renege on your pension benefits by declaring bankruptcy, do you actually have a pension? The authors' emphatic answer is no. Fortunately, the authors offer solutions for all of the above in part 2.
The second section deals with products that address the above problems. The authors do not endorse any particular company but introduce the concept of product allocation. Most are familiar with asset allocation, which determines the ratio of fixed-income to equities within a portfolio. Product allocation, on the other hand, refers to choosing types of financial products that address the risks cited in part 1. The authors describe 3 silos, or types of products, to purchase with your nest egg to deal with risks. One silo is composed of traditional investments like stocks, bonds, and mutual funds. Products in this silo can grow (if the market does well!) to provide inflation protection, liquidity, and a financial legacy. However, products from silo 1 may not provide sustainable lifetime income (unless you invest very well or have a large sum) and are subject to sequence of returns risk (early negative returns can reduce an investor's sustainable income). Silo 2 comprises products guaranteeing lifetime income i.e. address longevity risk. the risk of outliving your savings. CPP is an example of an annuity-type product. Defined benefit pensions are another form of lifetime income. Indexed annuities can also deal with inflation risk but at the cost of lower initial payments. These products also deal with sequence of returns risk. However, these products have disadvantages too. The annuity contract is irreversible (i.e. illiquid), and, if markets do especially well, future growth accrues to the insurance company, not you. Another problem is counterparty risk, the risk that the other party/ company won't live up to its commitments. However, that risk exists already in defined benefit plans (just ask former Nortel employees). Also, insurance companies are closely regulated in Canada. Silo 3 consists of hybrids like guaranteed lifetime withdrawal benefit (GLWB) products, which are mutual/ segregated funds that guarantee a minimum withdrawal rate (usually 4-5%). As expected these products provide intermediate risk protection. They provide inflation protection and growth potential, but not as much as products from silo 1 (costs are higher for GLWB products). They offer protection from longevity risk, but not as much as an annuity.
Part 3 moves from theory to practice and gives the reader a step by step guide to pensionize retirement savings. The authors introduce the concepts of Wealth to Need ratio (WtN) and retirement sustainability quotient (RSQ). The WtN ratio is simply your needed annual retirement income divided into your total nest egg. The wealthier you are (or the lower your spending), the higher your WtN is. RSQ measures the likelihood your retirement will last your lifetime and is defined as fraction of pensionized income (e.g. annuity or DB plan) + fraction non-pensionized income X (1 - risk of portfolio ruin). Portfolio ruin is the risk that your portfolio will be exhausted. The higher your RSQ is, the more sustainable your retirement income is.
If you browse the finance category, you'll see tens of thousands of books on personal finance and thousands on investing, but I can think of only one that tells Canadians how to guarantee their retirement income - all for less than the cost of an average haircut! Do yourself a favour. Quit worrying about your future. Buy this book and plan it instead.
The authors walk you through how to use annuities to create your own personal pension--guaranteed income that will last the rest of your life, just like the title says. They give you a step-by-step plan to determine how much income you need and how much of your portfolio you should annuitize in order to provide that income.
The book is very readable--hardly any jargon and no complicated math. My only complaint, if any, would be that it's a bit light on the specifics of how to choose between different annuities. (For example, which riders are worth their cost?)
Highly recommended for any soon-to-retire (or recently retired) Canadian investor.
The early part of the book is easy reading, probably because it was written by a financial planner who understands how to explain financial matters in simple English. However, the latter part of the book is written by the Economist. He has graphs, tables, and acronyms for everything. I found it difficult to understand some of the concepts. e.g. he will write something like, "You can see this illustrated in chart 10.2" and he expects you to figure out the chart on your own.
I have another six months before I want to "pensionize" part of my nest egg, so I am sure that when I read it a second time I will get a handle on it. But, it is unfortunate that the Financial Planner didn't take charge and re-write the stuff written by the Economist.
Nevertheless, for $17 you are getting good, solid information that will help you pensionize some of your nest egg and reduce the stress that many seniors suffer as we struggle with the question of "How much can I spend?".
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