In today’s episode, Jason is going to talk to Alexandra MacQueen. She is a well-known financial author and co-conspirator of many different projects. Today Jason and Alexandra are going to zero in on a core issue of retirement for any generation.
Episode Highlights:
- 1.19: For the last few years, Alexandra has focused on providing quality content; this is the new word that people use now.
- 1.30: Jason says, basically, the retirement income question or making sure that you do not run out of money when you are retired. This sounds like a simple premise, but frankly it has been called by Bill Sharp, Nobel Prize winner, that is the dirtiest problem in finance.
- 1.40: We are dealing with a problem that is nothing but variables except for one constant, and that constant is that you need wealth to consume, says Jason.
- 1.46: The variables are how long you live? what returns look like? what are you going to spend? and how does that expenditure vary? and then on top of that, what is the inflation? do we have to plan for it?
- 2.28: In the list of variables tax always think about planning for retirement and specifically longevity. The other issue with longevity is that it is what we call multiple; it multiplies all the other risks, says Alexandra.
- 3.31: Retirement is still a relatively new concept in western society. In the past most people worked until they were decrepit and died. And just to let further proof that, the first state-sponsored pension modern society was the Germans under Otto Von Bismarck, who basically set up pension date of 65 and was later move the 67. The pension was designed to basically pay you money when you were old so that there was no possible way that you could continue to contribute to society and continue to earn income.
- 4.20: Alexandra explains that when we talk about longevity, we actually lose a billion different number of billions? She says there are several different ways to measure it; there is life expectancy at birth. So, if somebody is born in 2021, they are expected to live well.
- 5.03 Alexandra says, “One of the things that you need to understand longevity is at what point are you measuring it?” She explains, If I look at life expectancy at age 65, you will notice it is five or six years longer.
- 7.03 Alexandra says we talk about life expectancy that is 50% probability but let us talk about how we are encouraged to use life expectancy?
- 08.17: Jason says we look at the impact of the decision if we are wrong. Do you want to die on your deathbed with more money in your account than you spent, or do you want to literally be worried about it prior to burning out on money?
- 11.35 Jason predicts, if you were not a smoker, your gains and mortality are minuscule. However, if you were a smoker, a large percentage of the population than yours were increased.
- 12.54: Alexandra says that the numbers in tables are actually quite different from what we call population life tables, which is the life expectancy for the entire population. This includes people in poor health. So, as a rule, people who seek out retirement planning advice are people anticipate living long lives and who are positioned to live long lives they have money they have asked for seeking out advice.
- 14.09: Jason talks about the various ways we can protect ourselves in longevity. So purely planning for that and preparing for that is important, but there are various tools we have to use for the planning.
- 14.25: Jason says that the downside to all these longevity gains has been that the timeline that we keep on planning keeps on getting longer and longer which basically means that - You need more and more capital to take care of it.
- 16.01 Alexandra suggests, “Your working career might only be 30 years. So just as a very basic math problem analysis - How am I saving and meeting my goals during my working life? How am I saving sufficiently to fund another 30 years? Doing nothing is actually fairly cheap compared to what we expect to do.
- 17.48: There are the old standbys of income annuity when you are transferring the risk to the insurance company in exchange for your one-way lump sum; they promised to repay you for as long as you’re alive.
- 21.24: The generic advice is delay because it is the cheap guaranteed lifetime source of income. It’s waiting for you when you turn it on, and that is amazing. It is just that it may not apply to the individual well.
- 24.54: The annuity is actually a solution through a better version. Because what we are talking about for the person align – “I should have taken CPP earlier, I would have had more to spend so they would have had more certainty of income.” That is what actually annuity provides.
- 27.15: Mortality credits is very simple; you put money in the pool. Alexandra says we can talk about it with PPP for example or any kind of longevity product that doesn’t provide a large debt. She says, If “I die even before taking a single payment. What happens to my money? Well, I only get $2500 out, and the remainder is left, and the sponsors or supporters then withdraw the money by other means through what is called mortality credits.”
- 30.45 Jason recollects about a product called Guaranteed Minimum Drop Benefit Fund. Those guarantees were so rich they caused some problems for insurance companies. And to this day, I still have clients who have a bunch of those are paying out very high guarantee rates.
- 32.22 Jason says from a business owner standpoint, and this is very convoluted by the fact that we start throwing in holding companies and other structures into place. Then the tax implications of these products or the number of different ways we can hold these things increase substantially, so there’s a lot of different options there.
- 34.34: As per Jason, longevity planning is problematic. There are a lot of variables. There is a ton of decisions.
3 Key Points:
- If your returns are substandard, but your life is short, then there is a chance that inflation is high. But if you only live a few years in retirement, inflation doesn’t have the chance to eat away at your retirement income or your savings.
- During the COVID pandemic, we have seen many newspaper articles about how average life expectancy has decreased. The layman understands what is meant when we say average life expectancy decreases because COVID is called period life expectancy. If the conditions that prevail now in this period continue, then life expectancy will be impacted.
- Now Canada Pension Plan (CPP) doesn’t actually formally use mortality credits. That is a kind of insurance. But the underline concept is contributions go in, and not everybody will make it to average longevity, so those who die early their premiums are then spread among the remaining people in the pool, which is what we call mortality process.
Tweetable Quotes:
- “Retirement is still a relatively new concept in Western Society.”- Jason
- “Life expectancy increases as you age.” - Alexandra
- “To say that the changes to mortality are going to stay our state permanent presumes that nothing changes now.” - Jason
- “The average information is absolutely useful in informing our decisions, but we all still look at the distribution and where you fall on that on the spectrum of various factors that affect you.” - Jason
- “Now the stakes are so much higher when the numbers that big, which is why a lot of people may make the wrong choice when it comes to pension commutations.” - Jason
Resources Mentioned
Transcript
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