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

Pensionize Your Nest Egg describes how adding the new approach of "product allocation" to the tried-and-true asset allocation approach can help protect you from the risk of outliving your savings, while maximizing your income in retirement.

This book demonstrates that it isn't the investor with the most money who necessarily has the best retirement income plan. Instead, it's the investor who owns the right type of investment and insurance products, and uses product allocation to allocate the right amounts, at the right time, to each product category.

This revised second edition is expanded to include investors throughout the English-speaking world and updated to reflect current economic realities.

Readers will learn how to distinguish between the various types of retirement income products available today, including life annuities and variable annuities with living income benefits, and how to evaluate the features that are most important to meet their personal retirement goals.

• Evaluate the impacts of longevity, inflation, and sequence of returns risk on your retirement income portfolio
• Make sense of the bewildering array of today's retirement income products
• Measure and maximize your Retirement Sustainability Quotient
• Learn how your product allocation choices can help maximize current income or financial legacy — and how to select the approach that's right for you
• Walk through detailed case studies to explore how to pensionize your nest egg using the new product allocation approach

Whether you do it yourself or work with a financial advisor, Pensionize Your Nest Egg gives you a step-by-step plan to create a guaranteed retirement income for life.

MOSHE A. MILEVSKY is Associate Professor of Finance at the Schulich School of Business and a member of the Graduate Faculty in the Department of Mathematics and Statistics at York University in Toronto.

ALEXANDRA C. MACQUEEN is a Certified Financial Planner professional in Toronto.

List of Exhibits xi

Preface xv

Preface to the Second Edition xv

Preface to the First Edition xvii

How to Use This Book xviii

Introduction: Why Retirement Income Is Better than Retirement Savings 1

PART ONE: WHY YOU NEED TO BUILD YOUR OWN PENSION PLAN: THE MOST PREDICTABLE CRISIS IN HISTORY 7

Chapter 1: The Real Pension Crisis 9

Up a Creek without a Pension Paddle 11

Mixing Defined Benefit Apples and Defined Contribution Oranges 12

It Takes Two to Tango: A Basic Lesson about the Nature of True Pensions 22

Guarantee versus Ruin 23

When Is a Pension Not a Pension? 24

There Ain’t No Such Thing … as a Free Pension 25

The First True Pensions 27

Chapter 2: Planning for Longevity: Risks While Waiting for Your Return 31

The Grim Reaper’s Coin Toss 35

Introducing Longevity Risk 36

Predicting Future Longevity 39

How Should You Insure against Longevity Risk? 41

Will You Get Heads … or Tails? 41

Chapter 3: How the Sequence of Returns Can Ruin Your Retirement 43

How Long Will the Money Last? 44

Clockwise Investment Returns 47

Counterclockwise Returns 49

Triangles, Bulls, and Bears: The Retirement Income Circus 51

Can Buckets Bail Out a Poor Sequence of Returns? 52

Chapter 4: Inflation: The Great Money Illusion 55

What Does This Mean for Retirees? 58

The CPI-ME and the CPI-YOU 60

Does the CPI Measure Your Spending? 62

A Reality Check for Your Retirement Spending 63

What Have We Learned So Far? 64

PART TWO: DEVELOPING A SUSTAINABLE RETIREMENT SOLUTION: THE MODERN APPROACH THAT IS HUNDREDS OF YEARS OLD 65

Chapter 5: Beyond Asset Allocation: Introducing Product Allocation 67

Product Allocation: New Baskets for Your Nest Egg 67

Three Product Silos 68

The Spectrum of Retirement Income Silos 70

How Do the Silos Stack Up? 72

Chapter 6: An Introduction to Life Annuities 73

Pension Contributions as Insurance Premiums 74

Buying a Personal Pension 75

When Should You Buy an Annuity? 77

Annuities versus Term Deposits 79

Is the Annuity Gamble Worth It? 81

Great-Grandma’s Gamble 81

The Power of Mortality Credits 83

What about 50-Year-Olds—Should They Buy Personal Pensions? 84

What about Interest Rates? 87

How Can I Use Annuities to Protect against Inflation? 89

Unique and Personal Insurance 90

Chapter 7: A Review of Traditional Investment Accounts 93

Asset Allocation in Your SWP 95

What Should You Put in the SWP? 96

Chapter 8: Introducing the Third Silo—Annuities with Guaranteed Living Benefits 99

Guarantees and Growth: How Variable Annuities with Guaranteed Living Income Benefits Work 101

Evaluating an Annuity with Guaranteed Living Benefits: How Should You Choose? 104

Chapter 9: Your Retirement Sustainability: Fundamental Concepts in Retirement Income Planning 107

Which Glasses Will You Wear? 109

How Many Eggs Can You Withdraw from Your Nest? 110

What Should You Protect Against: Floods or Meteorites? 113

Do You Feel Lucky? Pensions, Survival Probabilities, and Spending in Retirement 114

Pensions Change the Game 114

How Does Pensionization Impact Your Retirement Sustainability Quotient? 116

Pension Annuities: Step-by-Step Math 122

The True Gift of Pensionization 124

Chapter 10: The Most Diffi cult Question You Will Ever Have to Answer (About Your Retirement) 125

Retirement Sustainability or Financial Legacy? 127

Pricing Your Inheritance 128

Finding Your Spot on the Frontier 130

Chapter 11: Divvying Up Your Nest Egg 133

Creating a Retirement Plan for Robert Retiree: Cases 1 through 10 133

What Is the Cost to Pensionize? 137

When Should You Pensionize? 140

When Should You Turn Your Living Benefi t On? 141

Chapter 12: A Deeper Look at the Promise of Pensionization: Revisiting the Two Gertrudes 147

Activating the Time Machine: Gertrude at Age 65 148

Lifetime Income: Now or Later? The Implied Longevity Yield 150

Lifetime Income: Now or Later? The Role of Changing Interest Rates 152

A Tool to Help with Your Decision: The “What If I Wait?” Analyzer 155

Moving Beyond Yield: Understanding the Cost-Benefit Trade-off of Pensionizing Your Nest Egg 157

Pensionizing: Financial and Nonfi nancial Benefits 160

Summary of Part Two 161

PART THREE: THE SEVEN STEPS TO PENSIONIZE YOUR NEST EGG 163

Chapter 13: Step 1: Identify Your Desired Retirement Income 165

Estimating Your Desired Income from the Top Down 169

Estimating Your Desired Income from the Ground Up 169

Chapter 14: Step 2: Estimate Your Existing Pensionized Income 173

Public Pensions in the United States, United Kingdom, Canada, Australia, and New Zealand 174

How Much Will You Receive? 174

Benefits from a Defined Benefit Pension Plan 175

What If I’m Worried about the Future of My DB Pension Plan? 177

Timing the Retirement Decision 177

Completing Step 2 177

Chapter 15: Step 3: Determine Your Pension Income Gap 179

Your Average Tax Rate 180

Your Pension Income Gap 181

Adjusting for Inflation 183

Chapter 16: Step 4: Calculate Your Retirement Sustainability Quotient 187

What Kind of Eggs Do You Have in Your Nest? 187

Filling the Gap 188

Chapter 17: Step 5: Assess Your Plan: Is It Sustainable? 193

Chapter 18: Step 6: Calculate Your Expected Financial Legacy 197

Chapter 19: Step 7: Use Product Allocation to Pensionize the Right Fraction of Your Nest Egg 199

Case Study: Jack and Jill Go Up the Hill (to Fetch a Retirement Income Plan) 200

Step 1: Identify Your Desired Retirement Income 201

Step 2: Estimate Your Existing Pensionized Income 202

Step 3: Determine Your Pension Income Gap 202

Step 4: Calculate Your Retirement Sustainability Quotient 203

Step 5: Assess Your Plan: Is It Sustainable? 204

Step 6: Calculate Your Expected Financial Legacy 206

Step 7: Use Product Allocation to Pensionize Your Nest Egg 207

Summary of Part Three 208

Final Thoughts 209

Notes 213

Bibliography 219

Acknowledgments 221

About the Authors 223

Index 225

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