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Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life

ISBN: 978-0-470-95228-3
October 2010
Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life (0470952288) cover image
Pensionize 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.
Whether you do it yourself or work with a financial advisor, Pensionize Your Nest Egg gives you a simple plan to create a guaranteed retirement income-for life.
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Preface.

Introduction: Why Retirement Income Is Better than Retirement Savings.

PART I WHY YOU NEED TO BUILD YOUR OWN PENSION PLAN: THE MOST PREDICTABLE CRISIS IN HISTORY.

Chapter 1 The Real Pension Crisis.

Up a Creek Without a Pension Paddle.

Mixing Defined Benefit Apples and Defined Contribution Oranges.

It Takes Two to Tango: A Basic Lesson about the Nature of True Pensions.

Guarantee versus Ruin.

When Is a Pension Not a Pension?

There Ain't No Such Thing…as a Free Pension.

The First True Pensions.

Chapter 2 Planning for Longevity: Risks While Waiting for Your Return.

The Grim Reaper's Coin Toss.

Introducing Longevity Risk.

Predicting the Future of Longevity.

How Should You Insure Against Longevity Risk?

Will You Get Heads…or Tails?

Chapter 3 How the Sequence of Returns Can Ruin Your Retirement.

How Long Will the Money Last?

Clockwise Investment Returns.

Counter-Clockwise Returns.

Triangles, Bulls, and Bears: The Retirement Income Circus.

Can Buckets Bail Out a Poor Sequence of Returns?

Would Saving More Save Your Retirement?

Chapter 4 Inflation: The Great Money Illusion.

What Does This Mean for Retirees?

The CPI-ME and the CPI-YOU.

Does the CPI Measure YOUR Spending?

A Reality Check for Your Retirement Spending?

What Did We Learn So Far?

PART II DEVELOPING A SUSTAINABLE RETIREMENT SOLUTION: THE MODERN APPROACH THAT IS HUNDREDS OF YEARS OLD.

Chapter 5 Beyond Asset Allocation: Introducing the New Science of Product Allocation.

Product Allocation: New Baskets for Your Nest Egg.

Three Product Silos.

The Spectrum of Retirement Income Silos.

How Do the Silos Stack Up?

Chapter 6 An Introduction to Life Annuities.

Pension Contributions as Insurance Premiums.

Buying a Personal Pension.

Converting Your Nest Egg to Retirement Income.

When Should You Buy an Annuity?

Annuities versus GICs.

Is the Annuity Gamble Worth It?

Great-Grandma's Gamble.

The Power of Mortality Credits.

What about 50-Year-Olds? Should They Buy Personal Pensions?

What about Interest Rates?

How Can I Use Annuities to Protect against Inflation?

Unique and Peculiar Insurance.

Chapter 7 A Review of Traditional Investment Accounts.

Asset Allocation in Your SWP.

What Should You Put in the SWP?

Chapter 8 Introducing the Third Silo—Guaranteed Lifetime Withdrawal Benefit Products.

Guarantees and Growth: How GLWBs Work.

GLWBs: Issuers, Features, and Benefits.

Chapter 9 Your Retirement Sustainability: Fundamental Concepts in Retirement Income Planning.

Which Glasses Will You Wear?

How Many Eggs Can You Withdraw from Your Nest?

What Should You Protect Against: Floods or Meteorites?

Do You Feel Lucky? Pensions, Survival Probabilities, and Spending in Retirement.

Pensions Change Game.

How Does Pensionization Impact Your Retirement Sustainability Quotient?

Pension Annuities: Step-by-Step Math.

The True Gift of Pensionization.

Chapter 10 The Most Difficult Question You Will Ever Have to Answer (About Your Retirement).

Retirement Sustainability or Financial Legacy?

Pricing Your Inheritance.

Finding Your Spot on the Frontier.

Chapter 11 Divvying Up Your Nest Egg.

What is the Cost to Pensionize?

When Should You Pensionize?

Summary of Part II.

PART III THE SEVEN STEPS TO PENSIONIZE YOUR NEST EGG.

Chapter 12 Step 1: Identify Your Desired Retirement Income.

Step 1 - Identify Your Desired Retirement Income.

Estimating Your Desired Income from the Top Down.

Estimating Your Desired Income from the Ground Up.

Recap of Step 1.

Chapter 13 Step 2: Estimate Your Existing Pensionized Income.

Canada's Public Pensions.

Old Age Security.

The Guaranteed Income Supplement.

The Quebec and Canada Pension Plans.

How Much Will You Receive?

Benefits from a Defined Benefit Pension Plan

What If I'm Worried about the Future of My DB Pension Plan?

Timing the Retirement Decision.

Completing Step 2.

Recap of Step 2.

Chapter 14 Step 3: Determine Your Pension Income Gap.

Your Average Tax Rate.

Your Pension Income Gap.

Adjusting for Inflation.

Recap of Step 3.

Chapter 15 Step 4: Calculate Your Retirement Sustainability Quotient.

What Kind of Eggs Do You Have in Your Nest?

Filling the Gap.

Recap of Step 4.

Chapter 16 Step 5: Assess Your Plan: Is It Sustainable?

Recap of Step 5.

Chapter 17 Step 6: Calculate Your Financial Legacy Value.

Recap of Step 6.

Chapter 18 Step 7: Use Product Allocation to Pensionize the Right Fraction of Your Nest Egg.

Case Study: Jack and Jill Go Up the Hill (to Fetch a Retirement Income Plan).

Step 1: Identify Your Desired Retirement Income.

Step 2: Estimate Your Existing Pensionized Income.

Step 3: Determine Your Pension Income Gap.

Step 4: Calculate Your Retirement Sustainability Quotient.

Step 5: Assess Your Plan: Is It Sustainable?

Plan A: Spend Less.

Plan B: Pensionize a Fraction of Your Nest Egg by Buying an Annuity.

Step 6: Calculate Your Financial Legacy Value.

Step 7: Use Product Allocation to Pensionize Your Nest Egg.

Summary of Part III.

Final Thoughts.

Notes.

Bibliography.

Acknowledgements.

About the Authors

Index.

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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.

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