A three-part series on the implications of aging for retirement planning
In this, the second part of our three part series on life expectancy in Canada, we want to take a look at some interesting numbers. We offer the following analysis as an initial check for our pre-retiree clients in particular who may wish to factor some of this information into their thinking. An important note is that what follows is simply an analysis as opposed to a plan.
At The Wooding Group, we perform retirement financial planning on a personalized basis. But the following numbers are well worth considering. It wasn’t that long ago when financial planners based projections on the premise that a couple’s money had to be capable of supporting a 30-year retirement. That may have been true when people worked until 65 and very few lived past 95. Not anymore.
The new retirement reality
This new retirement reality was highlighted by Wade Pfau, a professor of retirement income at American College in Bryn Mawr, Penn. Said professor Pfau: ‘When it comes to retirement planning, 40 years is becoming the new 30 years for highly educated, higher-income people.’
Professor Pfau’s findings were summarized in detail by Ian McGugan, writing in The Globe and Mail (June 8, 2015). Mr. McGugan observed: ‘Adding an extra decade to your retirement planning spreadsheet isn’t a big deal if you’re one of the fortunate few with an inflation-protected defined-benefit pension plan. For everyone else, though, a longer retirement means a substantial dollop of added risk.’
The 4% rule
Some retirees plan their retirement strategy using the much quoted 4% rule, which states you can safely withdraw an amount equal to an inflation-adjusted 4% of your initial portfolio each year. But despite the apparent conservatism of the 4% rule, retirees may wind up disappointed if they follow it blindly.
Professor Pfau analyzed a well-known 1998 study by three professors at Trinity University in San Antonio, Tex., that looked at how various withdrawal rates would have worked out for U.S. investors over the preceding decades. The so-called Trinity Study found a 4% withdrawal rate succeeded in nearly every case – that is, it would have left people with money at the end of a 30-year retirement. But professor Pfau’s new numbers, which include results to the end of 2014, show that even the supposedly safe 4% rule looks questionable for today’s super-sized retirements.
The added impact of ultra-low interest rates
Adds Mr. McGugan: ‘Here’s the kicker: Those downbeat numbers don’t yet reflect the impact of today’s ultra-low interest rates because the most recent 30-year period in professor Pfau’s study began in 1985. If interest rates remain low in years to come, the success rate from even conservative withdrawal strategies is likely to plummet.’
Professor Pfau, in his monograph co-written with Wade Dokken of WealthVest – a U.S. based retirement planning consultancy – has reduced his withdrawal rates to even lower levels.
We have no wish to be alarmist – and though eminent in his field, professor Pfau is not infallible – but he now observes that according to his projections “over a 30-year horizon the highest sustainable spending rate is 2.12%. That is with a 20% stock allocation. Over a 40-year time horizon, the highest rate is sustained with 40% stocks; though this spending rate has fallen to 1.55%.” Debra Wooding adds that in light of historically low interest rates and The Wooding Group’s view that rates will rise very gradually, a 20% overall stock allocation is likely sub-optimal for the objectives of both growth and income. It is imperative for investor’s to seek thoughtful advice as they rethink their next phase and how that will be funded.
Our final blog in this series will be on retirement planning from a lifestyle perspective. We encourage you to watch out for it and, of course, please don’t hesitate to contact our team with any questions you may have.
The Wooding Group at CIBC Wood Gundy, 780 498-5047