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

by Milevsky, Moshe A.; Macqueen, Alexandra C.

• ISBN13: 9780470680995
• ISBN10: 0470680997
• Format: Paperback
• Copyright: 2010-09-07
• Publisher: Wiley

Summary

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.

Author Biography

Moshe A. Milevsky, 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.

Table of Contents

Preface	p. xi
Introduction: Why Retirement Income Is Better than Retirement Savings	p. 1
Why You Need to Build Your Own Pension Plan: The Most Predictable Crisis in History	p. 5
The Real Pension Crisis	p. 7
Up a Creek without a Pension Paddle	p. 8
Mixing Defined Benefit Apples and Defined Contribution Oranges	p. 9
It Takes Two to Tango: A Basic Lesson about the Nature of True Pensions	p. 14
Guarantee versus Ruin	p. 15
When Is a Pension Not a Pension?	p. 16
There Ain't No Such Thing ... as a Free Pension	p. 17
The First True Pensions	p. 19
Planning for Longevity: Risks While Waiting for Your Return	p. 21
The Grim Reaper's Coin Toss	p. 25
Introducing Longevity Risk	p. 25
Predicting Future Longevity	p. 27
How Should You Insure Against Longevity Risk?	p. 29
Will You Get Heads ... or Tails?	p. 30
How the Sequence of Returns Can Ruin Your Retirement	p. 33
How Long will the Money Last?	p. 36
Clockwise Investment Returns	p. 40
Counter-Clockwise Returns	p. 42
Triangles, Bulls, and Bears: The Retirement Income Circus	p. 44
Can Buckets Bail Out a Poor Sequence of Returns?	p. 45
Would Saving More Save Your Retirement?	p. 46
Inflation: The Great Money Illusion	p. 49
What Does This Mean for Retirees?	p. 52
The CPI-Me and the CPI-You	p. 54
Does the CPI Measure Your Spending?	p. 55
A Reality Check for Your Retirement Spending?	p. 56
What Did We Learn So Far?	p. 57
Developing A Sustainable Retirement Solution: The Modern Approach that is Hundreds of Years Old	p. 59
Beyond Asset Allocation: Introducing the New Science of Product Allocation	p. 61
Product Allocation: New Baskets for Your. Nest Egg	p. 61
Three Product Silos	p. 62
The Spectrum of Retirement Income Silos	p. 64
How Do the Silos Stack Up?	p. 65
An Introduction to Life Annuities	p. 67
Pension Contributions as Insurance Premiums	p. 68
Buying a Personal Pension	p. 69
Converting Your Nest Egg to Retirement Income	p. 71
When Should You Buy an Annuity?	p. 72
Annuities versus GICs	p. 75
Is the Annuity Gamble Worth It?	p. 76
Great-Grandma's Gamble	p. 77
The Power of Mortality Credits	p. 79
What about 50-Year-Olds? Should They Buy Personal Pensions?	p. 80
What about Interest Rates?	p. 82
How Can I Use Annuities to Protect against Inflation?	p. 83
Unique and Peculiar Insurance	p. 84
A Review of Traditional Investment Accounts	p. 87
Asset Allocation in Your SWP	p. 89
What Should You Put in the SWP?	p. 90
Introducing the Third Silo-Guaranteed Lifetime Withdrawal Benefit Products	p. 93
Guarantees and Growth: How GLWBs Work	p. 94
GLWBs: Issuers, features, and Benefits	p. 97
Your Retirement Sustainability: Fundamental Concepts in Retirement Income Planning	p. 101
Which Glasses Will You Wear?	p. 103
How Many Eggs Can You Withdraw from Your Nest?	p. 104
What Should You Protect Against: Floods or Meteorites?	p. 107
Do You Feel Lucky? Pensions, Survival Probabilities, and Spending in Retirement	p. 108
Pensions Change the Game	p. 108
How Does Pensionization Impact Your Retirement Sustainability Quotient?	p. 110
Pension Annuities: Step-by-Step Math	p. 116
The True Gift of Pensionization	p. 117
The Most Difficult Question You Will Ever Have to Answer (About Your Retirement)	p. 119
Retirement Sustainability or Financial Legacy?	p. 121
Pricing Your Inheritance	p. 122
Finding Your Spot on the Frontier	p. 124
Divvying Up Your Nest Egg	p. 127
What Is the Cost to Pensionize?	p. 130
When Should You Pensionize?	p. 132
Summary of Part II	p. 133
The Seven Steps to Pensionize Your Nest Egg	p. 135
Step 1: Identify Your Desired Retirement Income	p. 137
Step 1-Identify Your Desired Retirement Income	p. 137
Estimating Your Desired Income from the Top Down	p. 141
Estimating Your Desired Income from the Ground Up	p. 141
Recap of Step 1	p. 143
Step 2: Estimate Your Existing Pensionized Income	p. 145
Canada's Public Pensions	p. 146
Old Age Security	p. 147
The Guaranteed Income Supplement	p. 147
The Quebec and Canada Pension Plans	p. 148
How Much Will You Receive?	p. 149
Benefits from a Defined Benefit Pension Plan	p. 150
What If I'm Worried about the Future of My Db Pension Plan?	p. 152
Timing the Retirement Decision	p. 152
Completing Step 2	p. 153
Recap of Step 2	p. 153
Step 3: Determine Your Pension Income Gap	p. 155
Your Average Tax Rate	p. 156
Your Pension Income Gap	p. 157
Adjusting for Inflation	p. 159
Recap of Step 3	p. 160
Step 4: Calculate Your Retirement Sustainability Quotient	p. 163
What Kind of Eggs Do You Have in Your Nest?	p. 163
Filling the Gap	p. 164
Recap of Step 4	p. 168
Step 5: Assess Your Plan: Is It Sustainable?	p. 169
Recap of Step 5	p. 171
Step 6: Calculate Your Financial Legacy Value	p. 173
Recap of Step 6	p. 174
Step 7: Use Product Allocation to Pensionize the Right Fraction of Your Nest Egg	p. 175
Case Study: Jack and Jill Go Up the Hill (to Fetch a Retirement Income Plan)	p. 176
Identify Your Desired Retirement Income	p. 177
Estimate Your Existing Pensionized income	p. 178
Determine Your Pension Income Gap	p. 178
Calculate Your Retirement Sustainability Quotient	p. 179
Assess Your Plan: Is It Sustainable?	p. 180
Spend Less	p. 181
Pensionize a Fraction of Your Nest Egg by Buying an Annuity	p. 181
Calculate Your Financial Legacy Value	p. 182
Use Product Allocation to Pensionize Your Nest Egg	p. 183
Summary of Part III	p. 184
Final Thoughts	p. 185
Notes	p. 189
Bibliography	p. 193
Acknowledgements	p. 195
About the Authors	p. 197
Index	p. 199
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