You’re retired! Now what?

By Mark Yamada | September 5, 2014 | Last updated on October 3, 2023
4 min read

This article was originally published in January 2014.

“The risk of outliving one’s savings, the erosion of purchasing power, and the spectre of prolonged and debilitating personal or family illness or disability are complex realities that make investment decisions in a capital-accumulation plan simple by comparison.

That these decisions occur in the final one third of one’s life, when time is no longer an ally, makes the predicament more acute. This is the retiree’s dilemma.”

This description, from a paper my colleague Ioulia Tretiakova and I published in the Rotman International Journal of Pension Management in 2013, sums up the problem facing retirees today.

Yet, prospecting for retirees is not a priority for many advisors—unless the retiree has millions to invest.

Read: Growing income during retirement

This is because these clients have portfolios that are subject to negative cash flows, and limited growth potential.

Still, in five years, 70% of all investable assets will be in the hands of retirees or those on the brink of retirement, according to McKinsey & Company.

So advisors need to be prepared. Investment solutions designed for retirement seem limited to low-risk strategies like income, conservative balanced or money market funds.

Chart 1

Chart 1

Source: Tretiakova and Yamada. “Dynamic DC: Keeping Your Options Open,” Rotman International Journal of Pension Management, 2013. Link: dynamic-dc-keeping-your-options-open

Read: The new retirement math

But given the complexities facing baby boomers who will soon retire, the viability of these investment strategies deserves more attention. Here’s how to help.

Don’t ask the wrong questions

Average retirement equity allocations run between 30% and 40%. Target date funds (TDFs), the dominant defined contribution pension product in the U.S., also becoming popular in Canada, have an average equity weight of 35.2% after age 65, according to Morningstar.

The largest U.S. providers controlling over 72% of all TDFs are Fidelity, Vanguard and T. Rowe Price. Fidelity has equity weights in retirement averaging 30.2% and Vanguard 33.5%, while T. Rowe Price is at 37.6%.

Read: Canadians unprepared for rising interest rates

Investment professionals establish these asset allocations based upon the retirees’ need for income and portfolio stability. However, these experts and your compliance department are quick to assume that if an investor is older or retired and doesn’t have employment cash flow, then a conservative risk profile is always suitable.

But perhaps the investor simply did not save enough for retirement and needs to withdraw income from the portfolio. Depending on how much she takes out, she risks running out of money.

Read: TFSAs reduce retirement income risk

Chart 1 shows the probability of running out of money when drawing 4% of initial capital annually (adjusted for inflation) in a low to rising interest rate environment for various equity/bond mix assumptions.

Assuming popular equity exposure between 30% and 40%, you’d end up with a 24% to 33% chance of exhausting capital. Instead, a 70% to 100% equity exposure is needed to extend the life of capital. Compliance departments will need to rethink their suitability requirements.

Sequencing your risk

A static 40/60 asset allocation has the benefit of simplicity. You can easily calculate how long the money will last if you’re given a set withdrawal rate with a fixed return. But markets don’t work that way. Professor Moshe Milevsky notes the order in which returns occur has a huge impact on results. Using a 7% average return and a fixed monthly withdrawal rate, Milevsky uses annual returns of 7%, -13% and 27% (that together average 7%) to illustrate how the order that returns occur in impacts results (see “Table 1,” below).

Return Sequence Ruin Age (run out of money) +/- Months
+7%, +7%, +7%… 86.50
+7%, -13%, +27%… 83.33 -38
+7%, +27%, -13%… 89.50 +36
-13%, +7%, +27%… 81.08 -65
+27%, +7%, -13%… 94.92 +101

Source: “Retirement Ruin and the Sequencing of Returns,” Milevsky and Abaimova

Experiencing the bad year first, compared to the good year, changes the age of ruin by almost 14 years.

So it’s better to be more cautious early in retirement, and aggressive later.

*This is the first in a series of articles that will discuss post-retirement strategies aimed at extending the life of savings. Stay tuned for my next article, where we will examine product and strategy alternatives, and how to integrate a spending policy.

5 ways to help cash-strapped retirees

Your client is on the verge of retirement, but you’ve just found out he’s been spending well beyond his means—so much so he might not be able to retire. How can you help?

  • Create a chart

    Show how the changes will affect his goals. Include assets, accumulated cash flow, total net worth, and how these figures change each year until he’s out of the red.

  • Suggest working longer

    He could recuperate that lost income by working longer. If he’s not fit enough to commute to a job, Alan Wainer, partner at Crowe Soberman LLP, suggests working from home or opening a consulting business.

  • Consider renting

    Suggest he rent out a part of his home. Cathie Hurlburt, partner at Integrated Planning Group and senior planner at Assante Financial Management, says one of her clients owns a two-bedroom condo and rents out one room for $600 per month—which adds an extra $7,200 to her pocket each year.

  • Tell him to downsize

    Suggest he move from a house to a condo. The sale will offer capital, as well as lower property taxes and maintenance fees. Explain the positives (e.g., he won’t have to mow the lawn or shovel the driveway).

  • Discuss investments

    Bruce Cumming, executive director, private client group and senior investment advisor at Dundee Wealth, says the client could set up a GIC or annuity ladder, which will help stretch income. A life-only annuity is another option if he wants maximum cash flow and isn’t as worried about capital.


How to make smarter financial decisions

Retirees running out of money

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Mark Yamada

Mark Yamada is president of PÜR Investing Inc., a software development firm specializing in risk management and defined contribution pension strategies.