As retirement suddenly emerges through the fog of life, the ill-prepared move from concern to consternation, and then to panic.

The first reaction is to rearrange the three planning methods known to improve post-work living, like deck chairs on the Titanic. However, starting to save earlier, saving more and working longer have limited utility when time is no longer a friend. Spending less becomes the only solution.

Taking more risk is always a possibility, but most investment professionals hesitate. Diminishing time horizons increase the chance of withdrawing funds after a market decline, making recovery more difficult.

As I’ve noted before, the investment industry has little incentive to help retirees unless their portfolios meet ever-increasing minimums, some exceeding $1 million. Investment advisors are compensated for growing assets, not taking on clients who will be drawing them down.

The good news for retirees who can afford advice is that the value added from financial, tax and estate planning can be meaningful. The bad news is that the industry has few products to offer them other than pricey annuities that tie up capital, or conservative balanced funds.

Furthermore, advisors must manage more assets and clients just to sustain existing compensation in an era of fee compression. Retirees must sit quietly because there is no margin for servicing.

Retirees often end up in low-stock-exposure balanced mutual funds. With a 4% withdrawal rate, a 35% equity, 65% bond fund (corresponding to the 100-less-your-age rule of equity exposure) will be exhausted 26% of the time before dying in a low-to-rising interest rate environment, according to a 2017 Journal of Retirement article I co-wrote with Ioulia Tretiakova.

A one-in-four chance of running out of money seems outrageously high. A 50/50 portfolio is little better at a one-in-5.5 chance.

No wonder that running out of money before dying is a growing concern for the 30.5% of the population over 55 who are approaching or in retirement, and an immediate worry for half the Canadians aged 55 to 64 without an employer pension and median retirement assets of just over $3,000 (according to a Broadbent Institute study).

What to do now

With 20 years of life expectancy at age 65, here are two important things Canadians can do now: control costs, and manage risk using more than diversification. Controlling costs is discussed below, while managing risk will follow in a future article.

Control costs

Withdrawing funds regularly makes fee control more important. Take a $100,000 portfolio, assuming a 6% annual return and 2% in fees. After 20 years, with no withdrawals, the portfolio grows to $320,714 before fees. Fees take $106,603, or 33% of accumulated capital.

Now assume a $4,000 annual withdrawal rate. The portfolio grows to $164,743 before fees but $91,106 after fees. Fees take 44% of the portfolio’s value. For those who live five more years, 55% is consumed by fees.

Managing fees down to 1% per annum drops the pre-withdrawal take from 33% to 18% and the after-withdrawal take from 44% to 24%. For the person living five more years, the fee drops from 55% to 31%.

Assume a 65-year-old friend or relative retires with $1 million and withdraws $60,000 at the beginning of each year. A 6% annual return would leave $802,488 after 25 years before fees.

However, after deducting 2% in annual fees at the end of each year, the investor would have only $35,842 in her portfolio. While she would have withdrawn $1.5 million over 25 years, she would have also paid $735,356 in fees, or 96% of the portfolio’s value. Reducing fees to 1% can provide six more years of $60,000 withdrawals. What advice would you give her?

Table 1: Percentage of a portfolio, with a 6% annual return, lost to fees over time
20 years 25 years 30 years
$100,000 portfolio 2% fee 1% fee 2% fee 1% fee 2% fee 1% fee
No withdrawal 33% 18% 38% 22% 45% 26%
$4,000 annual withdrawal 44% 24% 55% 31% 65% 38%
$5,000 annual withdrawal 51% 28% 67% 38% 82% 49%
$6,000 annual withdrawal 64% 36% 96% 55% broke 85%

Table 1, above, shows the percentage of accumulated assets that go to fees at the end of various periods, costs and withdrawal amounts.


Fees and costs are always important, but when money is being withdrawn from a portfolio they become truly significant. One remedy is for asset managers to reduce fees for investors the farther into retirement they go or the longer they remain clients. Steadyhand (reduces total fees by 7% after five years and 14% after 10 years) and Edgepoint Wealth Management (by 5% to 10% of management fees after 10 years for qualifying funds) are the only firms I know that do this now, but I would be glad to hear about others.

Mark Yamada is President of PÜR Investing Inc., a software development firm. Disclosure: PÜR Investing Inc. provides risk-based model portfolios to Horizons ETFs.