Is it my turn to Retire? – Part ll

I was talking with a buddy last week who was having a crappy time at work.  Recent changes in the office has him working with new people, and from the sounds of the story some of the people don’t get business and the cardinal rule that before anything can happen you need a customer.  It seems there are more than a few people in the world who don’t like ‘unreasonable’ customer expectations or the consultants that feed those high expectations by working a little harder than the average bear.

So, as we are having this conversation, my buddy advised me that he has reached out to his personal financial advisor (not me) to find out how close he is to pulling the trigger on retirement.  The last numbers he saw said that he could go in about another two years and there would likely be money left over by the time he was 90.  He is looking for a refresh on the numbers and although it was not said, I am sure there might be some interesting weeks ahead if the numbers say he is closer to two weeks away rather than two years away.  Cue two-weeks-notice-man.

As we talked, I reminded him of what I have been writing about for a few years.  In a DC world, it often takes a couple of years until after you retire to know if you have enough saved up and that he needs to carefully consider how good the ‘number’ his advisor is giving him – since if things don’t work out, it won’t be his advisor that ends up sleeping on a park bench.  The other thing we talked about was the variability around ‘the number’.  I also reminded him that almost everyone I have dealt with closing in on retirement in a DC plan has hedged by working an extra few years since too much money is an easier problem to solve rather than too little.

After the call I started thinking and since I was alone in the car for about six hours, I did a lot of thinking.  I came up with an experiment.  I sent my buddy back to his advisor to not only get confirmation on how much longer he needed to work before he could officially start his golden years but also to see what an annuity would cost starting at the same time.  Since buddy has already figured out his monthly/annual budget in retirement he just needs to figure out how to pay for it.  One way to tackle retirement income is to build up a big pile of cash to invest and then draw it down after work stops.  The other approach is to take the cash and buy an annuity and skip the draw down phase – or in modern lingo the decumulation phase – that is such a popular topic these days.

So, what does this experiment tell us?

  1. If the annuity costs less than the nest egg that he has built, then it provides some proof that he is ready if he wants to go.
  2. If the annuity costs more than the nest egg but the advisor says he has enough then it raises some questions around the assumptions that the advisor is using about how the nest egg will be invested and drawn down.  In particular, how much investment risk is needed to make the lines meet and at what age is the advisor modelling ‘the ending’?

Separate from the experiment is the actual decision on going with the annuity or the drawn down model.  As I have written in the past, I am partial to annuities for retirees that are at risk of running out of money.  No one wants to regret a long life.  Regardless, the experiment itself is an educational tool that will help the average worker understand a little better how their nest egg stacks up.  Since not everyone has a personal actuary, this approach uses the insurance company actuaries as a proxy.

Joe Nunes
Joe Nunes
Joseph Nunes, Co-founder and Executive Chairman of Actuarial Solutions Inc., has practiced in the area of pensions and retiree health plans for over 30 years. He has experience with many types of plans including single-employer, multi-employer, private sector, government, unionized, non-unionized, as well as registered and non-registered executive plans.

1 Comment

  1. Avatar Mike Duggan says:

    Sage advice for your pal, Joe. I have used annuities a lot in certain circumstances in the past, typically with a 10 or 15 year minimum guarantee period – just so the annuitants are safe. In my 50+ years in the business, I’ve never had an annuitant die before the expiration of the guarantee period.

    Some brokers I’ve competed with show a higher monthly annuity income, but fail to provide a guarantee period. Buyer beware.

    People today often don’t look at mortality tables, how long their parents, aunts, uncles, grandparents lived, etc. I recently had a client outlive her RRIF and it was traumatic for her.
    Advisors need to be conservative and prudent in their assumptions.

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