June 25, 2020

Annuities, Financial Planning, Fundamental Topics, Retirement, Safe Withdrawal Rates

Episode 104: Fred Vettese: A Complete Guide to Retirement Income

June 25, 2020

Annuities, Financial Planning, Fundamental Topics, Retirement, Safe Withdrawal Rates

Today, we get into a masterclass on retirement planning with a true expert in the field whose perspectives are distinctly evidence-based, Fred Vettese. Fred is a Partner and former Actuary at Morneau Shepell and author of three retirement books including Retirement Income For Life. We hear Fred’s thoughts on what people should be spending in retirement, why there is not a retirement crisis in Canada, and how Canadians can live on far less than they have been told. Fred talks about how to prepare for a bad investment outcome, as well as the problem of underspending early on and ending up with too many assets. He is a big proponent of people deferring their CPP until after 70 and buying an annuity with a portion of their money in most cases. Our guest weighs in on annuities, talking about how to buy them, which types to buy, and why ALDAs exacerbate the problem of early underspending. We query Fred about when people should start their CPP and OAS government benefits, and then move to hear his thoughts about different bear markets, how to invest during them, and what the current massive government interventions mean for the future of taxpayers. Fred gets into the risk of getting a retirement age date wrong, why he doesn’t endorse the 4% spending rule, and how retirement planning is affected by owning versus renting a home next. He also makes a case for when reverse mortgages are a good option, why long-term care insurance makes no sense, and why interest rates are so low right now. Wrapping up, we hear Fred’s thoughts on what this all means for early retirees, people still in the workforce, and those just entering it. Tune in for Fred’s brilliant perspectives on all this and a lot more in what should be an evergreen resource for any Canadian looking for solid retirement instructions.

Key Points From This Episode:

Introducing Fred Vettese and his evidence-based work on retirement planning. [0:00:16.3]
How Fred and Bill Morneau dispelled notions of a Canadian financial crisis. [0:02:45.3]
Rethinking the rule that Canadians spend 70% of their income in retirement. [0:04:55.3]
Fred’s conclusion about how spending tracks inflation during retirement. [0:09:27.3]
Strategies for how retirees can take on less risk but still have enough money. [0:12:00.3]
Avoiding underspending and ending up with too many assets later. [0:15:08.3]
The benefits of annuities and why they might not be that safe anymore. [0:16:55.3]
The pitfalls of annuities indexed to inflation over combining all income sources. [0:20:00.3]
Why ALDAs exacerbate Canadians underspending at younger ages. [0:22:47.3]
When to start CPP and OAS government benefits, and tips for exceptional cases. [0:25:59.3]
Whether this bear market is vanilla or not and how it affects investment decisions. [0:30:25.3]
The effects that massive government stimulus could have on taxpayers. [0:32:28.3]
Drawbacks of saving for an over and underestimated retirement age. [0:35:12.3]
Thoughts on the 4% spending rule now that bond returns are 0%. [0:37:20.3]
How people owning versus renting a home affects retirement planning. [0:39:09.3]
When it’s a good idea to take out a reverse mortgage. [0:41:36.3]
Why long-term care insurance makes no sense; poor coverage for the price. [0:44:10.3]
The link between aging populations and low interest rates/inflation. [0:47:40.3]
The impacts of this low interest rate environment on early retirees. [0:52:10.3]
Whether Monte Carlo simulation is a useful tool and what success rates to aim for. [0:53:49.3]
Why early retirees can withstand a lower Monte Carlo success rate. [0:56:11.3]
The reason people who are not retired yet should be saving 20% of their income. [0:56:59.3]
Fred’s advice for people entering the workforce to live within their means. [0:58:52.3]
How Fred defines success: having a minimal amount of regrets when it’s all over. [0:59:55.3]

Read the Transcript:

We often hear about the global retirement crisis. Can you tell us, in your opinion, does Canada have a retirement crisis?

Well, the answer I think is no, certainly not at the present time. This was really the subject of my first book when I co-wrote with our finance minister, Bill Morneau back when he was with Morneau Shepell. And we wrote that book simply because there were so many articles at the time that there was a retirement crisis. We even sent a 60-second survey, we called it, to our clients to see how they felt about it. And lo and behold, I think 71% of them said that they thought there was a retirement crisis. So that's why we wrote the book. So here are some of the statistics that help dispel that crisis.

First of all, at the time we wrote the book, the poverty rate, if you want to use the low-income cutoff as a measure of it, poverty rate amongst working age Canadians was about 11% of the time, and poverty rate amongst seniors was about 5% or 6%, in that vicinity. So if there was a poverty problem in Canada, it seemed like it was the working age population that was bearing the brunt of it. Then when we actually delved even further into the numbers, even that five or 6%, it seemed like we only got there if you were like the people who weren't getting the full OAS and GIS, that's the Guaranteed Income Supplement.

And why wouldn't they be getting that? That would be because they would have been fairly recent immigrants to Canada. And then that then brings up a philosophical question about whether they should be expecting to get a guaranteed retirement income from Canada given that they came here fairly late in life. And I won't get into that, but that goes to show that there really wasn't a very high incidence of poverty amongst seniors at that time. Now, the reason why Canadians may be feel that way that there is a poverty problem is because when it comes to retirement matters, the perception lags reality by a very long time.

Back in the '60s and '70s before Canada Pension Plan and GIS were fully matured, there was a very serious poverty problem, and probably 30 or 40% of seniors were below the poverty line at that time, but that's long been solved.

This might speak to just the concept of poverty in retirement. We hear rules of thumb, like a common one I think is that people will spend 70% of their pre-retirement expenses in retirement. We're not generally big fans of rules of thumb. Is there a more robust approach that people can use to estimate how much of their spending they're going to have to replace?

Yeah. The 70% number, so it's 70% of grossed income is the retirement target that goes back quite a long ways. And I've tried to find what the source of that was initially, and you have to go back quite aways. So I found one publication by a large US consulting firm and they were quoting a paper, so I looked at the paper. And it was interesting in that paper, they showed the expenses in retirement. Then they had this filler, which was about 20%, which wasn't anything else. They had already covered everything that people could possibly spend in retirement. They covered things like insurance, they covered food, shelter, entertainment, tobacco, everything can possibly think of. And then they had this 20% filler.

Well, the only way you got to 70% was by using that filler number. Another way to look at it though is, think about how the average working age person, say somebody at 45, 50 spends their money. And they, apart from the usual spending on themselves, in other words, for entertainment, food, shelter, and all that, they also are putting money down toward a mortgage, they're raising children and so on. If you just strip all those things out, the saving for retirement, which might be say, 10% of pay, money toward a mortgage, could be anything these days, but let's say 15 to 20% of the pay there, potentially.

Children would be another 10% of pay easily during their growing years. And you stick all those things up, and also take out taxation, you find that people are actually living off If people are only living on 30 or 40% of their income for most of their lives, there may be a few years at the very end if they reach age 60 and by that point in time, their kids have left the home, they've paid off their mortgage or whatever, where they can certainly spend much more. But for the vast majority of their lives, they've been spending nowhere near 70% of their income on themselves, they've been spending on all those other sources.

So if look at that, and if you wanted to come up with a simple answer, you might say that the rule of thumb would be more like 50%, but that would be in your typical case, which, think of a typical case as being where people have a mortgage that you're paying off, and also they're raising at least a couple of children, that would be the typical situation. Where you get to 70% would be in only the situation where someone is renting their whole lives and they never have any children, and then they may end up spending as much as 70% of their gross income on themselves, but that would be a fairly rare situation in Canada.

Interesting. Yeah. I guess the implication of that is that people who are planning to replace 70% of their gross income are over saving or working too long. Is that right?

Right. That is right. It's not just theory as well. I get feedback from retirees all the time who say that, well, they were worried about this, but then they got to retirement and found the things weren't as bad as they thought it was going to be. I've read surveys, one called The Portrait of Seniors in Canada that was put out by the government, and it showed that the satisfaction rate just with their lives, they were actually much happier in retirement and satisfied with their lives than they were before retirement. Once again, showing that when they actually got there, they found that they can actually live on less than they were being told that they'd have to live on.

And you think, "Well, who's perpetuating this myth then that it should be 70%?" Well, there're all kinds of people who would actually benefit from this. If we look at the governments themselves in civil service, they have pension plans, which are geared where the 70%, and nobody's really keen to, at least who benefits from that, to see that being reduced. You even look at the argument that they make as to why they need 70% of the often say, the argument the often make is that, "Well, people don't always have 35 years of service. They may actually enter this civil service late and only have 20 years of service."

Well, great, but should they be getting a 70% pension or a very hefty pension on that basis? What do they do then with people who actually do have 35 years? There really is no good argument for a 70% pension plan. Then of course there's the financial advisors themselves. And of course, they, for the most part are receiving a percentage of the assets, and so they also would be benefiting from people saving more than they need to be saving. Now, the picture is changing though. And I've said there hasn't been a crisis in Canada, there isn't one currently. It's not to say that there isn't one developing. And the reason why there would be one developing is because interest rates have gone so low, and I think that may actually feed into one of your other questions, so I'll just wait for that.

So speaking of anecdotal evidence, we have a number of clients who are retired, who have been taking the same dollar amount out frankly for years, and they have not had the public inflation rate impact their own spending. Do you have a thought around inflation during retirement?

Yeah, definitely. This is based on many studies that have been done, not too much studies in Canada, but I'm looking at longitudinal studies done in various parts of Europe. For example, there's a major one that was done in Britain, another one done in Germany, another one in Sweden, a couple of studies in the US as well. And they all saw the same thing. One German study, for example, it was based on 40,000 households, and they have this survey they used and they found that spending followed what they thought it was going to follow during people's 60s, in other words, as they were drawing down their assets slowly, during that period of time.

Then something surprising happened around age 70. And what happened was, suddenly, instead of their assets still drawing down, their assets started going up at that point in time. So they investigated further and they found that what happened was people just started spending less money at that point. So the inflection points seem to be somewhere between age of 70 and 74. So that was that study. And then every other study that I've seen from Europe, including the one from Britain, says the same thing. And it doesn't even matter what the income level is, at a high income levels and low income levels, generally speaking, people's spending in retirement seems to track inflation during their 60s, and then it seems to slow down fairly rapidly, I should say, actually from age 70 to 75. And then it keeps on slowing down after that, into their 70s and then into their 80s.

And it may or may not be going up in their 90s because by that point in time, they might be living in a retirement home and their spending needs by change simply because they need personal support workers and so on. So what I concluded from this is that the kind of income people ought to be looking to secure for themselves in retirement would be an income that's growing with inflation in their 60s, and then maybe going with inflation minus 1% in their 70s, and inflation minus 2% in their 80s, which these days really means no inflation at all after age 79.

Yeah, that's fascinating. And I think probably counter-intuitive for most people. A lot of stuff that we've been talking about relates to retirement spending, what is the right amount to be spending. And I think that all relates back to the fear that people have of running out of money. They don't want to spend too much such that they deplete their portfolio before, well, before they die. And part of that is the chance of getting bad investment outcome. You're going to get some outcome over your retirement lifespan and some people get a bad one, that's a reality. What are some of the things that people can do leading up to retirement or maybe early in retirement to deal with that possibility of just getting a bad roll of the investment outcome dice.

There's several things they can do. And we are getting into a new situation, as I mentioned earlier, we have lower interest rates these days of lower investment income that people can get from their assets than they ever were able to get before. It's almost forcing people to be putting their money into stocks, which you otherwise wouldn't want to be doing. So I did a few things. One thing I did was I, right now, the investment returns you can get on savings, say from a bank, would be about 2%. So I thought I'd just do a little study to see what would happen if a couple aged 65 put all their money into a bank, a savings account earning 2% for the rest of their lives.

And I thought what it was going to show was that they were going to fall way short of their income target and that they'd be forced to put money into stocks. But based on the target that I chose for them, they actually made it okay, they actually had enough money to live the kind of lifestyle they wanted for the rest of their lives at just earning 2% per year, because I was comparing that against a poor investment returns scenario, I would've call it fifth percentile scenario. If you look at the Monte Carlo Simulation and all the possible results, I looked at one where they only match the fifth percentile of all returns in every single year, and they would have been much worse off than they wouldn't have met their retirement income goals.

So that begs the question, if you're meeting the goals without taking any risk at all, then why take risk? And that is one answer to the question. The other thing I recently explored was, can people shorten their investment horizon? So take a 65 year old, once again, and their investment horizon these days would be pretty close to 25 years because they can expect to live pretty close to 90. You might say, "Well, isn't the average life expectancy closer to 80?" It is from birth, but it's actually closer to 90, especially for women if you're already 65. And so if you look at that, 25 years is a long time and you figure, "Well, I can't rely on savings and savings' interest rates for that whole time, so I need to be in stocks."

And that's assuming that you try to stretch your own savings for that whole period of time. But take another scenario, and this works if you have what about $500,000 in savings? So take the scenario where you actually spend the $500,000 during your 60s and you defer collecting Canada Pension Plan until age 70. So if you have a spouse and both of you are already pretty close to the maximum, not necessarily all the way there, but close to the maximum CPP until 70. Then what you can do is you can actually end up getting much more Canada Pension Plan benefits starting at 70 than you can at 65. In fact, the benefit level is of a 42% higher.

So what you do is, you spend that money first, your savings first, then you rely more on CPP and OAS from age 79. And I found that in that case, that's essentially shortened your investment horizon from 25 years just to about five years, say between age 65 and 70. So that's something else that they can do just so they don't have to worry about what's going to be happening, whether the next pandemic is coming and there's going to be another situation they have to worry about in five or 10 years time.

Yeah, that's fascinating, and again, counter intuitive. I think a follow onto that is we're talking about consuming financial assets early in retirement and then deferring pensions to replace that income later. So based on that, do you think, because a lot of people I don't think are doing that, they're trying to make their assets last. Do you think that it's also a risk for retirees to underspend and to end up with this huge pile of assets that they never got to consume?

I think that happens all the time, people are under spending their whole lifetime. That happened to my father and it happens to many people I know. Certainly, it's understandable. The first thing you want to do is make sure that you don't outlive your money and that you ended up having a decent centered living for your whole retirement. You may not know until you're 75 or 80 whether your money's going to last long enough or not. When you're 65, there's really no way of knowing how much income you ought to be drawing and what's going to be happening, so it is a real concern. And that's why people tend to underspend. I'd say the vast majority of people do.

This idea of people way over spending it and not having no money left, I think that's more of a myth. Maybe it's more of an American kind of idea than it is Canadian. It just isn't in our nature to be doing this. But here's the problem, with interest rates so low, what people have done historically, and that is living off their investment income and not touching the principle, it's not something that they can do from here on in. If you're in fixed income and you're only earning one or 2% per year, you can't live off of that and leave your principal intact, you're going to have to draw down that principal.

Which I know makes everybody uncomfortable, pretty much everybody is uncomfortable with that idea. They want to keep that intact just in case something happens. So they have to start thinking about drawing down their principal as well. And the question then is, how do they do that in the most sensible fashion so that they do have enough money to last themselves a lifetime? As I said, if they leverage off the Canada Pension Plan and the fact that it pays so much more at age 70, then that is one of the ways to do that.

The obvious next question is annuities. Annuities can make a ton of sense to make sure you don't run out of income, but when it actually comes time to write the check, a lot of people just can't let go of that cash. So what do you think is the best way to make a compelling argument to people to consider annuities?

Well, I considered annuities actually in an all three of my books, first book, we have The Real Retirement and again in The Essential Retirement Guide and finally in Retirement Income For Life. And I've been a pretty big fan of annuities, and I know that they're a really hard sell. I know that fewer than 5% of retirees ever taken annuity. And that's funny in a way, because when it comes to defined benefit pensions, Canadians will look with great envy on the civil service because they have defined benefit pension plans, and everyone says, "Aren't they wonderful? It's too bad we can't have them as well." All the employers in the private sector have abandoned those plans quite a long time ago.

And yet they can duplicate by using some of their money, their savings, to buy an annuity and essentially have that defined benefit. And it's funny that, because when it comes to a defined benefit pension plan, especially a public sector plan, people look at all the positives from that, that it's predictable income, it's secure income. But when they look at annuities, they look at all the negatives, the fact that they no longer have that money for rainy day spending, they had the opportunity cost of not being able to invest that money, the loss of control of that money. Those are all the kinds of things they look at, but it's actually the two sides of the same coin.

But having said that, my thinking on annuities is changing a little bit, and maybe this is only a temporary problem. But what's happened is, interest rates have gone down substantially over the past six months, this is even dates before the pandemic started. But certainly since then, we're now looking at 10 year bond yields, for example, in Canada, down to 0.5, 0.6%. And more recently in history, they were more like one and a half, 2%. And obviously, before that, we were looking at more like four or 5%. I think the long-term average is like 5% for 10-year bond yields.

And you just say, "Well, what does that have to do with annuities?" The annuity price is largely based on the interest rate on long-term investments or long-term bonds. And so if bonds have gone down that much, it means that annuities have gotten that much more expensive. So it does beg the question, have they gotten too expensive? Is this like a temporary aberration right now with interest rates as low as they are? Which you'd be foolish or at least imprudent to be devoting a good chunk of your retirement money to buy an annuity now only to see the interest rates leap back up again in a year or two years' time once this pandemic is over and once all this uncertainty has gone from the economy.

And I think the thing is, I can't answer that question. I understand the issue, because my argument used to be with annuities, well, you're going to be devoting a good chunk of your retirement assets toward fixed income anyways. So if that's going to be the case, then you may as well put that into annuities instead. But I'm no longer thinking that people are going to be putting out a good chunk of their money into long-term fixed income investments given that it's interest rates are so low. So you do have to wonder whether this is really the best time in the world to be doing it or if you ought to be postponing that decision a couple of years.

What are your thoughts on if someone does decide they will buy some annuities, what are your thoughts on how fast to buy them? Would you stagger them over a number of years, certain age you'd start, any thoughts?

I think that's a good idea. The decision to buy an annuity or not, it's kind of like an investment decision, and it's kind of like market timing. So if you put all your money at a one time, it's like you're call making a call on the market. And as you know, no one seems to do a very good job at market timing, except maybe by exceptional luck. So by straggling it over a bunch of years, you're guaranteeing yourself that you're not going to be buying at the very worst possible price. And by the way, if one does buy an annuity and you have a spouse, it should definitely be a joint and survivor annuity, one where it continues to the spouse if he or she survives you.

In fact, the kind I like would be the kind where, now let's say I joined a two-thirds survivor annuity, I would call it, where the two-thirds of the amount continues to the surviving spouse regardless of who that spouse is. So whether it's the husband or the wife, two-thirds of that amount continues. So that would be one thing. The second thing is, I do not endorse it. I had all the idea of buying an indexed annuity when that's indexed to inflation.

Is that just because of cost?

It's not just because of cost. One of the problems that people make with their retirement savings is that they look at what they want it to do, and they think what they want their retirement savings to do is to produce a steady stream of income. And let's say a steady stream of income in real terms, we've got my great argument about how that income won't be going up with inflation. Let's assume we didn't even know that, and so you might think you want it to go up with inflation for the rest of your life just so that you can preserve purchasing power.

But the thing is you have to look at each component of your assets as to what it can do best. So you've got a pension plan and Old Age Security, those are fully indexed to inflation. You may have other savings as well. And so rather than looking at each piece having to have the same shape, you just want to make sure that you look at your overall income from all sources, that it has the right shape. So for example, you might ended up working two or three or four years into retirement on a part-time basis, and that will be producing some income. So you can then reduce the amount of income you need to produce from other sources to the extent that that's the case. So my studies, what I've found is that you really don't need to have an indexed annuity in order to produce the kind of shape of retirement income curve that you want.

You've got the inflation production coming from the CPP and OAS, you may also have some other sources of income as well, like non tax sheltered assets, your GFSA and so on and so forth. So all you want to do is make sure that this is producing a steady stream of income for the rest of your life. And besides that, you'd have a hard time finding one that's actually indexed to inflation, maybe indexed like increasing by one or 2% per year, but you'd have a hard time finding it, because insurance companies just don't like selling them and so they sell them at a pretty high price. As you say, cost is really an issue.

What do you think about the newer advanced life deferred annuity that the government came out with more recently?

I thought the ALDAs, I don't know, not people have adopted that short form or not, but anyway, the ALDAs are something that you can buy now at whatever your age is, 60 or 70 or 50. And you don't actually have to start your income until age 85. This is something you couldn't do before, before, you had to start your income by 71. There would otherwise be, I guess, deemed or imputed income for after age 71 that you have to pay tax on and that's why these were a non-starter. But now you don't have that problem anymore, at least once these things are adopted. I thought this would be a really good thing because this would ensure people are never going to have to worry about running out of money, they always know that there will be that an income stream from age 85 and up. Great.

So the trouble is, when I try to model this for my typical situation of a couple now in their 60s with their retirement savings, and let's assume that they put aside 20% of their savings and use it to buy this ALDA that starts income at age 85. The trouble I always found with my modeling is that it ends up producing too much income from age 85 and on it doesn't produce enough in the earlier part of their lives. In other words, it exacerbates the very problem that I was saying earlier that retirees seem to have in Canada, that they're underspending at younger ages. I think it's just going to make it even worse if that's the case. I found that once again, if they simply defer time to pension plan until age 70, that they ended up having a better stream of income, one that more closely matches their needs and wants than buying the ALDA.

It's not to say that they're totally a mistake, I would say, just to give some people a peace of mind. They might want to devote a smaller percentage of their savings, five or 10% of it to buy some incomes, just so they know that if things really did come to worse then they'll still have some income in late in life.

Are there any cases from just a pure wealth maximization perspective? Like if someone has a lot of wealth could an ALDA help with, I guess minimizing those RIF minimums?

I'm not sure why minimizing RIF minimums... I actually do know why it's really minimizing the RIF payments is such a big deal for Canadians because you have to pay tax on it. So this is money that you've been tax deferring your whole life, how you got tax deductions on the contributions you made when you were putting money into an RSP. And so by age 71, now you have to start receiving payments from your RIF and you have to start paying tax on it. People hate doing that, so they try to defer it as long as they can. They can do it until 71, but really no later. But the purpose of that money was to provide retirement income. I'm not sure why you want to keep on deferring it much longer.

Yes, you will have to pay income tax eventually, but you also want to have income in your retirement that's going to produce the lifestyle that you want to have. And I think it's one I've done the modeling there, are people actually withdrawing the minimum each year from their RIF? And as you know, the amount keeps on going up. It ends up being as much as 20% of your assets, by age 90. I found that it actually produces a pretty good curve in terms of the income that you want to be achieving in retirement. So I don't really see it as being an issue, I see the bigger problem once again, as I was saying earlier, being a people, not withdrawing enough money and not drawing enough of an income earlier in life.

So speaking of income, I'm guessing probably one of the most popular questions the three of us have received over our careers is, when should people start the government benefits, the CPP and OAS? So let's give you a chance to give us your thoughts on that.

Yeah. Well, I guess I've tried and touched on that already. First of all, there's a difference between OAS and CPP. I've always been a big proponent of starting CPP at age 70. Now, that's not true in every situation, and I'll give you some of the exceptions in a minute. I'm not as big a fan of starting OAS at age 70. Their argument for CPP, first of all, is that if you started at age 70 versus 65, the amount of pension income you get is going to be greater in real terms by 42%. And I said, say at least 42% because between 65 and 70, the maximum for CPP is going to keep on going up with wage inflation, not price inflation.

So let's say wage inflation in Canada has been about 1% more than price inflation every year on an average over the last 90 years, and let's say that continues into the future. If that happened, then it really means that your CPP at 70 is almost 50% higher than it is at 65. That's a lot. And remember now that that ends up being fully indexed to inflation and it's payable even if you live until 104 or whatever. So that's one reason I like preferring CPP. Essentially, this is getting into some actuarial terminology, but essentially, the way they've computed the increase in CPP is based on their assets earning 6% interest.

And as you know, you're not getting anywhere close to 6% guaranteed return, but that's essentially what you're doing by deferring your CPP until age 70. Old Age Security, I'm not as keen on because the benefit, if you defer until age 70 is higher by only 36% versus the 42% higher for our plus for CPP. So that's one reason I don't advise it. Second reason I don't advise deferring it is because it's already a very hard sell trying to convince people that they ought to be deferring CPP until age 70, because they can see the rest of their assets being drawn down so quickly and that just stresses people.

So getting them to do both CPP and Old Age Security is just going to be too much. That'll now just depress them even further, so I just don't see the case for it. Now, there are exceptions. If you're going to be hit by the OAS claw back, if your income is high enough, which I heard was roughly 80,000 plus these day in income and retirement, and so your OAS starts getting clawed back then you may as well defer it until age 70 and keep your fingers crossed and hope something happens between 65 and 70 that it won't all be clawed back after age 70.

But I think all it gets clawed back now, and obviously you have to be at a pretty high income level for it to happen, there's really no point in receiving it. I am 67 and I am not receiving my OAS, I decided to defer that until age 70. So that would be one exception where you actually do want to start it later. Now, going the other way with CPP, there is an exception to starting at 70. And that exception is if you keep on earning employment income after 65. This is complicated. If you keep earning employment income after 65 and you defer CPP until 70, you have no choice but to keep on contributing toward the Canada Pension Plan between 65 and 70.

This is not very well known. Even the administration department at CPP doesn't seem to know this uniformly. I've had readers write in and say, "Well, what you're saying is just not true because I still have employment income and I'm not contributing toward CPP, and so obviously that's not how it works." They were apparently administering it wrongly. Now, that isn't the way it actually works. You do have to keep on contributing, that's the requirement. And you might say, "Well, that's fine. If I keep on contributing, I get that much more CPP benefit. Isn't that a good thing?" Except that if you already earned the maximum CPP by age 65, then your additional contributions between 65 and 70 don't earn you any additional benefit.

The most extreme example would be somebody who had their maximum CPP at 65, and then they're self-employed, they'll be putting an additional roughly $26,000 between 65 and 70 and not getting anything out of CPP for it, for all that, it's additional money that they're putting in. Unfortunately, that's just the way it works. Here's the funny thing, if you decided to start your CPP at age 65 even if you still had earnings after 65, you don't have to contribute toward the Canada Pension Plan. That's just one of those quirky rules, and this just seems like they're not keen on changing it, so you have to work around it.

On behalf of a client, I have to ask you a question. She read one of your articles in the paper, was just starting retirement, and based on the volatility on her portfolio due to the pandemic, she wondered if she should start drawing on CPP earlier in order to let her portfolio recover?

Well, if she knew for a fact that investment returns were going to be robust for the next few years, and I'd say, "Great, let's do it." But I don't think any of us knows that. I actually thought the opposite would happen, that we'd see further turmoil in the investment markets. And who knows, we still might have, we just don't know that for a fact. The way I analyzed it was just the opposite, I look at it as, this is actually even more reason to be starting CPP late. Drawing down your money means that you have less exposure because you're drawing down to the money that's already at risk and using it as income, and the additional CPP benefits you're going to get from 70 and on isn't that risk, you will be getting that you don't have to worry about the pension plan paying you that benefit.

And on top of that, interest rates have gone down so much that getting any decent return on that money is going to be more difficult. The other thing I analyzed as well as I look at the bear markets we've had since 1950. If you don't count the current one, there were 10 bear markets, there had been 10 bear markets since 1957, seven of those I would call your plain vanilla bear markets where it was a fairly, nothing really unusual happening to the economy, market simply got overheated for a while, the economy got a little overheated, we fall into recession, unemployment goes up a little bit, stocks fall, and they do that for a while.

So I found in those seven plain vanilla bear markets. The market went down on average about 27%, and those bear markets lasted on average about 10 or 11 months. Then there've been three special bear markets which were not playing vanilla by any means. So these are the ones where essentially our lives changed overnight, and there would have been the one that surrounded 9/11 for example, the one that's run to the oil price shock in 1973, 74, and finally 2008, 2009, where we had the global financial meltdown, which could have been even worse than it was. So those were not plain vanilla, and in those ones, what happened was the drop was about double. I think the drop was 56% in the stock markets, from top to bottom.

And on top of that, they lasted about twice as long, 21 months instead of 11 months. And so you have to ask yourself, the current pandemic situation where the world has changed in a very fundamental way and maybe we'll never be quite the same again, is it the plain vanilla bear market, it one of those unusual ones? Well, you can guess what I think it is. And so we haven't seen that big drop yet, we haven't seen markets falling 50% yet. So I have to wonder whether or not what we've seen right now is a nice little bear market rally here, which is an opportunity for people to get out of the market. I can't counsel people to do that because I don't believe in market timing, but I guess I'd give it some pretty hard thought myself.

It'll be fascinating to see the outcome because I think the government intervention has also been unprecedented, not just in terms of the amount, but in terms of the type of stimulus that governments are trying to implement.

You have to wonder about just what kind of price the taxpayers are going to have to pay for all that government intervention. You hear a phenomenal deficits being created by this. like $250 billion in Canada when before we were getting stressed over $20 billion deficit. To give you an idea as to how this could affect us in the long run, back in the 1960s, the government decided that they were going to allow pensioners who had just 10 years of contributions under the Canada Pension Plan to get a full CPP benefit. So anyone who retired with 10 years of contributions from 1977 and nine, got a full benefit from the CPP, whereas now we have to work essentially 39, 40 years. So you have to contribute toward the plan for 40 years to get a full benefit.

So even though there weren't that many people collecting CPP back then, and even though the amount of benefit wasn't all that great, the cost has been enormous for Canadians who've had to contribute toward the plan ever since. We're contributing roughly 10% of employer/employee combined into the CPP. The actual value of the benefit by admission of the true factory of the CPP is only about 6%. We're paying 10% for benefits only worth six, something that's not really well known. And we're going to be doing that for the rest of our lives and our children's lives. And that differential, that additional 4% we're paying is because of the, I guess, the largesse that politicians deemed it appropriate to be granting to our pensioners back in the 1970s.

So you wonder, if that has such a major repercussion, then you have to wonder, well, what about the current spending that we're now incurring because of the pandemic and what kind of impact we're going to be facing as a result of that in terms of taxation and so on into the future?

Yeah. I think that's a massive global unknown right now, it would be very interesting to see the outcome.

Correct.

We're talking about retirement planning generally, and people do that based on some expected retirement date. We've mentioned the age of 65, that might be called a normal retirement date, but people pick a date and they plan around that date. How much of a risk is getting that date wrong?

It's a pretty big risk, and it's one that's not easily solvable. So there've been studies done where they asked people who were still some years off from retirement as to when they were expecting to work until, and that age was, on average was about 65. And then they actually looked at people who had retired and looked at the age of that at the average age at which they had stopped working full time, and that age was 58. So there was a seven year gap between the two. And most of that gap has got to be made up on two factors. One is that people are pushed out of their jobs by employers before they wanted to be pushed out or expected to be.

And the other factor is health where somebody might've thought they'd be healthy enough to work until 65, but found that they actually couldn't. So for those two reasons that it was that seven year gap. Now, that's huge because we were talking earlier about once normal compensation, I guess, during the lifetime and how that's actually used, so you're paying down your mortgage and let's say you plan to have it all paid off by the time you're 55, and your children leave the house by the time you're 57. So then you have eight years when you don't have any mortgage payments or child expenses. And that might be the time when people might be thinking, "Well, this is when I'm really going to up my saving for retirement and putting in a lot more money for the next eight years until I retire at 65."

If suddenly you're retiring at 58 instead of 65, that has a huge impact, you just haven't had time to put the money aside. So then let's look at the opposite situation, let's say, you think, "Well, you know what, maybe I'm going to be pushed out early, or I won't have that good health, so I better make sure I've saved all the money I need to say by age 58." May be a good problem to have, but then you end up working until 65, then you end up having a lot more money than you ever thought you would have. You end up having a much better standard of living in retirement than you'd ever thought you would have, but it probably means that you've struggled and suffered more than you needed to in your 40s and 50s.

So there really is no good answer for that because people just don't have full control of when they can actually leave the workforce.

Another very common question, Fred, that we all get asked often relates to the rule of thumb about the 4% spending rule, which is you can safely withdraw 4% of your portfolio in the starting year, then adjust for inflation thereafter. So is 4% safe withdrawal rate?

It might've been a safe withdrawal rate at one point in time. Back in the 1990s, if you look at government of Canada bonds and real return bonds, and the real return that is after inflation would have been 4%, 5%. When you look at bonds today, the real return is 0%. So you need to get a real return of 4% for the 4% rule to make some sense, and you're not getting it from bonds. So you have to be getting it from stocks, but even the real return expected on stocks is not going to be 4% anymore as it has been historically. So you have a problem doing it.

Here's the thing, I've done some Monte Carlo simulations on this where people have used the 4% rule, but then they had bad investment returns. So by bad, I mean, their returns attract the fifth percentile mark every year. You might say, "Well, that's not going to happen." But yes, it can happen. By definition, it's going to happen one time in 20. And if that ends up happening, then you're going to find that your money will run out by applying the 4% rule. It isn't actually a safe rule to be following, at least not blindly here, you'll have to actually start curtailing your spending if you find that your actual investment returns have been nowhere close to what you thought they were going to be.

So I don't actually endorse the 4% rule. If you're going to use any rule at all, I would simply do the minimum withdrawals required under the referrals.

Oh, that's interesting. We've done a lot of work on the 4% rule as well. I think one of the most interesting pieces about it, forget all the expected returns that you just mentioned, which is massive, you had a big one is that it was designed for a 30-year retirement period. And a lot of people are planning for an early retirement, but using the 4% rule, then just the math doesn't work. You alluded earlier to renters having higher consumption throughout their lives. How do you think that decision as a pre-retiree or someone who's accumulating assets, how do you think the decision to rent or buy a home impacts the overall financial planning process?

First of all, let's assume that the merits of owning a house aren't going to be any different in the future than they have been in the past, and homeowners have been generally rewarded for owning a house for the past 40 years. It's been a good time for it, mind you, that coincides with the boomers going from being in their 20s to being retired, which I think maybe largely explains the housing boom phenomenon that we've seen. But let's forget that for a minute and just say, "Well, how are people affected in the retirement planning by owning a home versus renting?" So if you rent instead, you're not putting aside large chunks of money every year in order to pay off your mortgage on your house.

It means that you can spend that money on yourself, so your consumption can go up. And as I said, that coupled with not having children would be the way you end up spending as much as 70% of your income on yourself in your working age years. The trouble with that is that you're now used to it, and so you're going to have to keep on doing that in retirement. And we talked earlier about the 70% rule, you're going to be really hard pressed to be actually saving enough money to be producing 70% income in your retirement. If you own a home, you've got that as an additional asset, so it actually does two things. It's a double whammy.

One thing it does is it depresses your discretionary spending during your working age years. So you're spending that much less money, hence your retirement expectations are actually that much less. I don't know very many people who actually end up spending substantially more in their retirement, not on a sustained basis than they were spending in their working age years. So you spend less on yourself, and that would mean that your retirement goals are easier to reach. On top of that, you've already got that as an asset, and that is a substantial amount of money that you may or may not ever have to tap.

In my books, I'm assuming that people aren't actually not tapping that under the typical situation that they are using their RSP/RIF savings, they're using their money from pension plans, they're using TFS savings, maybe some non-tax sheltered financial assets, but they're not tapping the equity in their homes for retirement, but you've always got that as a backstop,

That's interesting, but it sounds like it comes down to, in a lot of ways, discipline over consumption. Renters can consume more, but if they don't and save the difference, I guess they wouldn't have that same issue, they'd have the asset, right?

Correct. That is correct. Yeah.

This is becoming a master class on retirement planning, so here's the next question for you, Fred. Reverse mortgages, I think it's safe to say have a pretty bad reputation to a lot of people. Is there a case for retirees to consider digging into their home equity through a reverse mortgage?

Well, I think so. I think there is, but the case shouldn't be coming up too often. So in my third book, Retirement Income for Life, which actually a second edition is coming up this fall, I've analyzed that to some extent. And first of all, what I tried to do was create a situation where somebody needed a reverse mortgage, in other words, they weren't able to produce the income that on a sustained basis that they needed to for the lifestyle they wanted. But then in my example I'm looking at a couple of who might've retired in their 60s, and then come their late 70s, their money starts running out and they either have to take a big drop in their lifestyle or they have to find some other source of the money.

So I'm suggesting that a reverse mortgage would be the way to do that. What that would do is it would provide them a substantial amount of income for the rest of their lives. So I looked at the possible downsides for this, and you have to know the rules for reverse mortgages. First of all, you'd never have to pay back the money as long as you're life, as long as you or your spouse still stays in that home. But if you decide to take out a reverse mortgage at 65, 70, the problem with that is that, well, first of all, the amount of money that you can actually tap from the equity in the home may not be enough to last you a whole lifetime.

Then you end up using up that, you're tapping the equity using it all up, and then still not having enough money to last for the rest of your life. The other problem with it is that there's just too many things that can happen, a divorce would be the worst possible situation, but another one is you simply want to move. I think after 75, you're a lot more stable, you're more likely to be staying in the same home or at least wanting to stay in the same home for the rest of your days, at least until the time comes when you move into a retirement home.

So when I've done the analysis, reverse mortgages do make sense if you wait until after 75 to get them, and you really need to get it. So as I said, I tried actually to engineer the circumstances under which somebody needed it. And if they adopted all the other steps that they ought to be doing, like let's say, differing CPP at age 70, and buying an annuity with at least a portion of their money, then I was hard pressed to come up with a situation in which a reverse mortgage would even be needed. But having said that, if it is needed and you're past 75, you don't think you're going to have to want to be moving again for the rest of your life, then I don't see why you wouldn't be doing it.

Yes, you're paying a bit more interest on a reverse mortgage than you would be paying on home equity loan, but try and get a home equity loan if you're short on income, and if you're older than 75, you probably wouldn't be able to get that anyway.

Right. Yeah, I agree, that'd be unlikely. What about potentially high costs of long-term special health-related care later in life? How should people be thinking about planning for those costs?

That's pretty difficult to plan for. Question is, are you going to be in a very unusual situation or are you going to be, I guess, are you looking for the typical situation? First of all, many people never need long-term care. Those who do, typically need long-term care for two or three years, four years, and they need global dependent if they don't want to go into a nursing home. Well, I guess we've heard a lot about nursing homes lately in Canada, you really wouldn't want to be doing that, but if they have to go into a nursing home, if you didn't have any money, you can still go into one.

If you want to avoid going into a nursing home and you want to have a lifestyle that you can stay in your own home and you have around the clock care in your place with personal support workers, that's going to be very expensive to do, and it's actually going to take a lot more money than you've ever had. And so the question, how do you actually fund for that? The equity in the home is maybe about the best way to actually fund for it, and it's hard to do it any other way, you can't really do it from savings. You can't say, "Well you know what, I'm going to spend even less money because maybe I don't have to go into long-term care much earlier, for whatever reason, like early onset Alzheimer's or whatever."

There are some contingencies in life that you just can't plan for, so the question is, well, does that mean that you ought to be looking at long-term care insurance? And I analyze this with an insurance company pretty carefully. And the short answer to that question is no, but it's no because long-term care insurance, it looks just like the opposite of what you really want. What you want is for insurance, let's say for example if you have home insurance or car insurance, you want the insurance to cover you if you get into a really bad accident or you have a bad scenario, like your house burns down, whatever, you want to be covered for that.

Similarly, if your car gets totaled, you want to be covered for that. And you're prepared to pay a deductible, maybe a 500 or $1,000, but if they cover the big cost. With long-term care insurance is just the opposite, it's like it's paying you that deductible. It covers the first couple of thousand dollars of income or after a certain age, but it doesn't cover beyond that because of inflation or other factors, you actually need $5,000 instead of 2,000 and you're still not covered for it. So it's just the opposite of what you want. There's a bunch of other negatives with long-term care insurance that go beyond that, but that really was the main thing I found about it.

Well, actually another one that I wanted to mention too is, think about insurance as, when you take a life insurance, you think of healthcare insurance like critical illness insurance, home insurance, whatever it might be. You're hoping you never actually have to use it, but it's for catastrophic reasons, but if you do use it, you say, "Well, thank God I had the insurance." So when I looked at the typical situation for long-term care, i.e. where you start receiving at age 87, 88, and you need it for three years. I found that somebody simply saved the same amount as the premiums from age 55 and on, that they actually were better off than if they bought the insurance.

So you can see is self-insure. So it didn't make any sense. I can't say I made any friends with that insurance company, and to their credit, they were actually very helpful in opening up their books and explaining to me as to how it worked. But once I saw how it would work, I said, "This doesn't make any sense."

Wow. I guess we could summarize that as long-term care insurance does not make economic sense in general.

I found seven reasons why it didn't, those are two of the big ones. Actually, another one was by the time you actually decided that you need long-term care insurance, you might be 65 years of age, whatever, that's too late to actually get it. You have to think about getting it at 55.

You alluded to earlier interest rates being low, and that we can probably expect that to be true going forward. Why? What are the economic reasons that interest rates probably aren't going to be going up?

Well, most of us seem still think that the reason why interest rates are so low is maybe they might think this feeds back to 2008, 2009 with the financial crisis end, quantitative easing really drove down interest rates, and then it was a recession for a while. And those were the reasons why they were low, and then they lingered low after that. Now, we have new reasons why they're low because of the pandemic. Those aren't really the main reasons why interest rates are low. The main reason why it's low is all because of demographics. That is by far the biggest reason.

By demographics I mean, there's a lot more people who are over 50 than they used to be versus the people who are under 50. And then it all comes down to supply and demand. People over 50 by and large are the ones with assets, there are the people who have money set aside. People under 50 are the ones who are borrowing. So we have a lot of people with money who are trying to find a place to park that money to get a return. People under 50 are the ones who are borrowing money, and the more they have of those, then the more it drives up interest rates because of supply and demand.

What's happened since the 1980s is that population has aged, and let's look at Canada, it's aged pretty rapidly. We have a lot more people now over 50 years or 60 than used to be the case because the boomers have all gotten older. So it's changed the whole supply and demand. We have a lot fewer borrowers, a lot more savers, and that's what's drives down interest rates. So that's why we had real interest rates on risk-free bonds 4% back in the 1960s, and now real interest rates are more like 0% because of the supply and demand situation. If there's any doubt, if that's the reason or not, then all you have to do is look at other countries.

Japan got older than us, as sooner as they started getting older, they crossed the threshold in terms of aging back in the 1990s. So they were like 20 years ahead of us on that aging curve. And sure enough, they've had interest rates of around 1%, 2%, even 0% ever since the 1990s. And we used to think that, well, they were just a special case, it's different culture, who knows what's going on, but now we finally weren't pretty as special case, it was just our population has not aged faster than we were. Europe is the same thing. Europe started aging about 10 years ago faster than we were. Once again, they were ahead of us and sure enough, their interest rates are lower than ours, and they have now grappling with negative interest rates.

And then Canada, well, a little older than the US, US has always had suddenly higher interest rates in Canada. Once again, I think it's because of the demographics. You might say, "Well, but then there's still China. China's got a huge population and isn't that the tiger economy? Aren't they going to maybe just inflate the rest of the world with their dynamic young workforce?" Well, that's the thing, Chinese population is actually aging a lot more rapidly than most of us realize. And I talked about a threshold of sabers versus borrowers, they're going to be crossing that threshold just around now in 2020. And they're going to have an older population than in Canada by 2030.

So even China can't save us. So this is going to be something that the world is going to be having to confront and face over the next 25 years. I actually don't see any scenario under which interest rates can go up in that case.

Your explanation made me think of something else. Does that also tie into inflation? Like we would need to have a lot of net borrowing to have high inflation, so would we expect with this low interest rate environment to also have low inflation going forward?

Yeah. Now, the answer is yes. We would expect that. The question is whether the pandemic is something that is such a black swan, so off the wall that maybe it's going to change things. We have to ask ourselves that question. We're looking at, as I said, deficits of $250 billion in Canada, deficits of 10 times that amount in the United States, and all that spending, will that lead to inflation? That is a $64,000 question. That's always a possibility. Otherwise, I would've said no. I would've said looking at the historical examples of what's happened in Japan, what's happening in places like Germany that it's not going to happen because it hasn't happened there.

In fact, Japan tried to raise their inflation rates a few times in that period by bumping up spending and they just weren't able to. The impact of an aging population, that factor was just such a strong one in terms of keeping interest rates and inflation down.

Right. And the Japanese deficits haven't grown as quickly as maybe the Canadian and US deficits are growing now, but the Japanese government deficit is massive.

Yeah, that's correct. That's correct. And in spite of that, they still have a very, very low interest rates.

We're in this super low interest rate environment, we've talked about the impact of that on retirees in general, if we ungeneralize and say, how much more of an impact does this have on someone who's an ultra-early retiree, like where there's this whole financial independence retire early movement, where people who are say, 35 years old are retiring, how much riskier is a super early retirement like that compared to a normal retirement?

I'd say, it's far more difficult to retire early than it is to retire at 65. It's always been difficult. It's not just a matter of say, 65 to 90, you becoming 55 to 90, it's more than just that, because between ages 55 and 65, you're not going to be getting Old Age Security, you're not going to be getting CPP. So if you're retiring on a half a million dollars of assets or something in that vicinity, it's going to be much harder to do that. That has always been the case. Now, it's actually gotten much worse, and that's because before, you had some hope of being able to live off the investment income, because you were getting a real return of maybe more like three or 4%, even on risk-free investments.

Today, you're getting a real return of 0% on risk-free investments. So it means that when you're retiring early, that you're going to have to draw down your principal. And drawing down a principal from age 55 is a lot more of a scary proposition than drawing it down from 65. The average person, I don't know how they're going to be doing that. Let me put it this way, they'll have to have a lot more money put aside than they think they want to retire at 55 versus 65.

It's going to be an interesting experiment because there's a whole cohort of people who are retiring in their 30s and planning to spend 4% from their portfolio. Well, I guess in 25 years, we'll get to see what the outcome was.

Follow up to that question, we use Monte Carlos simulations extensively in our retirement planning with clients, do you think it's a useful tool?

Certainly Monte Carlo simulations help somewhat, but once again, garbage in garbage out, so the question is, how good is the input to the Monte Carlo simulations? And they tend to be based on the historical behaviors of the markets, for example, the correlation between bonds and stocks, what stocks have done in the past, the good years versus the bad years. So you can model some of that, but the question is, whether the world is changing. For example, the Monte Carlo simulations that I've been using with the help of Morneau Shepell, is assuming that the really low interest rates we have now are going to start climbing slowly over the next few years.

And so we'll be seeing our interest rates on bonds, again, of 3.5% versus 1.5% today over the course of the next 10 years. And that has a big impact on what the Monte Carlo simulation is going to show. It's going to show that being in bonds is going to be a terrible place to be. Now, bonds are going the other direction, they go from 1.5% down to negative 0.5%, then it means that long-term bonds are going to be the best place to be over the next 10 years. So these are the kinds of things that you really can't gauge. That's why I say, it's about the best tool you can use, but it's not by any means a foolproof tool.

What sort of success rates should people be aiming for?

By success rate, what do you mean exactly?

The success rate in the Monte Carlo and the output of the Monte Carlo simulation?

I think it depends on the risk tolerance of individuals. I think in general, people will figure, well, if they're protected in 95% of situations, then that's pretty good, and they all go with that. Other people might only feel that as long as 20th percentile scenario, in other words, there's only 20% chance of things going bad, then that's fine for them. Others, don't want to take any risks at all, my mother would have been certainly one of them. She wouldn't want any risks, in which case, when you put that into the model, it tells you, you can't put any money in stocks at all, if that were the case.

But this current pandemic is a great example of looking at how people analyze risk. You might look at what the risk is of actually catching it, and if you catch the virus of actually dying from it, if you're a healthy person under the age of 65 with no pre-existing conditions, you may have a chance in 10,000 of dying, but it is having a huge impact on how people are living their lives now. And if they actually understood the outs better, then maybe they would do things differently. When people take the five or 10% risk with Monte Carlo, it's almost as if they don't actually believe that there's as much risk as the model is actually showing them.

Do you think there's a relationship between the retirement period and the Monte Carlo's success rate that someone would aim for? Like we referred to that ultra-early retirement where it's a 60-year period versus a 30-year period, would the ultra-early retiree be expecting a lower Monte Carlo success rate, and willing to accept maybe a lower Monte-Carlo success rate?

I think so, if only because everything has to work out in the fullness of time, so everything should be averaging out. And even this period of super low interest rates we're going through, some of the market turmoil we're going through, this will happen from time to time, and it's happened in the past and it'll happen in future. If you have a very long time investment horizon, then you can take it all in stride and just know that when you do have a year of negative returns, well, that was expected. So don't worry about it too much. You can't really say that to somebody who's 68 and who needs every penny of their money.

Oh, that's really interesting. I've not heard it framed that way before. That's a good way to think about it. Let's just switch, we've been talking about retirees this whole time, lots of people are not retired. for someone who is still accumulating today, how much do you think people need to be saving? How much of their income do they need to be saving to fund, say a normal retirement?

That's really interesting question. I think going back to the wealthy barber and just general rules of thumb, people have always figured if you save 10% per year, then you're doing pretty well. I actually studied that question once looking at the historical periods, if you are saving money for over 30 year periods from age 35 to 65, starting from 1938 to '67, 1939 to '68 and so on, how would you have done? And let's say that your goal was to achieve the same standard of living after retirement. And I found that you needed to save only as little as 5% a year in certain 30 year periods, and you had to save maybe as much as 12% a year, another 30 year period.

But generally speaking, if you save 10% a year, you would have been doing just fine. And this is the situation, well, maybe this time it's different. You always have to be cautious of anybody who tells you this time it's different because it usually isn't. But as I said, because of the demographic factor, which is different from anything we've ever seen in the past century, it is potentially different, we will be single interest rates for the foreseeable future. And if that really is the case, and you take that into account into the model, it may mean having to save as much as 20% over a 30-year period in order to achieve a satisfactory retirement, which is a lot more than I've ever suggested people say before or anyone else's would be suggesting.

Yeah. I guess the other big one in there, and it's probably related, yeah, I think it is related to what you just said, but the prices of stocks, you mentioned this earlier, if you take US stocks for example, and just based on how high the prices are relative to their trailing earnings, you'd expect pretty low returns in the future.

The S&P 500 is quadruple the price it was back in 2009. So you have to wonder, it can really quadruple again in the next 10 years? Not totally a rhetorical question, but the odds are, it won't.

If we have a listener today, Fred, that is just entering the workforce now, what would it be the one best piece of advice you would give them?

I'd say, live within your means. I would say, have some flexibility when it comes to saving for retirement, maybe you still want to keep your savings rate of... You still want to be putting aside 10% of your money every year on average, but there will be times in your life when you just can't do that, your second child is on the way, you have daycare expenses, you have other expenses, which you have never had to face before. Maybe for a few years, you just can't. And when I looked at modeling and people consumption patterns in their lifetimes, periods in your 30s is the hardest time to be saving.

And it's fine for 60-year-olds who have a six-figure income to be telling people to be saving 10 or 20% per year, but then you're 32 and you got those two kids and daycare expenses and other expenses, you just can't do that. But I'd say, if that's the reason, then maybe you do give yourself a bit of a break. You do have to start by 35, and if the reason why not saving is because you're trying to get a better lifestyle than you should, that would be a bad reason.

It's a great answer. My last question and one we get reminded often on our discussion board to never forget, I wanted to ask you, how do you define success in your life, Fred?

The way I define success?

Yeah.

I'd say, having a minimal amount of regrets later on when it's all over.

Terrific.