The New Retirement by Sherry Cooper adds value to the recent
plethora of literature on retirement income by providing a Canadian
perspective. It is well written and easy to follow however Dr.
Cooper's book is a disservice to any reader that is looking for
advice on how to draw down their nest egg in retirement.
While there is a wealth of academic literature suggesting that for
an optimal income portfolio, a large portion of most retiree's
wealth should be invested in life annuities, Dr. Cooper dismisses
these products as 'expensive'. Really - compared to what? Dr. David
Babbel at Wharton has shown mathematically that 'trying to
replicate a lifetime income without the risk-pooling of a life
annuity will cost 25% to 40% more'. Furthermore, the fees that are
built into the life annuity are a small fraction of the 1% to 2%
annual fees that an investment dealer would typically charge to
manage the portfolio preferred by Dr. Cooper. Indeed a more
realistic criticism of life annuities might be that the fees built
into the product are insufficient to provide the level of
compensation many investment advisors need in order to explain the
advantages of life annuities to their clients.
Dr. Cooper's list of risks in retirement has some gaping holes.
Inflation risk is inadequately dealt with and she neglects to
include Sequence of Return risk. To illustrate this risk, examine
the impact of a retiree investing in the list of high quality
dividend paying stocks that Dr. Cooper illustrates. In the first
quarter of 2008, this basket of stocks would have lost about 8.7%.
If, after having spent or lost 10% of the portfolio in 3 months,
the retiree followed Dr. Cooper's advice and continued to withdraw
up to an inflation-adjusted 5% of their initial retirement assets
per year, the probability of financial ruin would be quite high. On
the other hand, if the retiree chose the same basket of stocks
within a hypothetical segregated fund (called variable annuities in
the US and in this book) with appropriate withdrawal benefit
options to protect against Sequence of Return risk, the retiree
would not have lost money. Variable annuities are dismissed by Dr.
Cooper as an 'ill-suited financial product' sold by 'unscrupulous
wolves in sheep's clothing … targeted at retirees'.
Protecting your nest egg in retirement involves different and more
complex risks than those involved in accumulating the funds needed
for retirement. Retirees need to understand these risks, they need
to make changes to their portfolio when they begin withdrawing
money and they will not find good advice on to how to optimize
their retirement income in The New Retirement.
Lowell Aronoff
CEO, CANNEX Financial Exchanges Limited