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

Paperback | August 30, 2010

byMoshe A. Milevsky, Alexandra C. Macqueen

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Pensionize Verb. 1. To convert money into income you can't outlive. 2. To create your own personal pension, a monthly income that lasts for the rest of your natural life.

With the subpar performance of the markets, record-high personal debt levels, and shockingly low savings rates, it's clear that many Canadians expecting to retire in the next decade simply don't have a sufficient nest egg to ensure a worry-free retirement. Making matters worse, only about one-third of Canadians currently belong to a formal, or registered, pension plan; and even a large number of that "lucky third" will not retire with a guaranteed pension income.

If you no longer have the time to wait and hope for your traditional investments to pay off, the answer is to "pensionize your nest egg" using the new technique of product allocation set out in this book. Pensionize Your Nest Egg explains how to

  • Recognize if you really have a pension or just a tax-sheltered savings plan.
  • Become informed about the new risks you and your nest egg face in retirement and why asset allocation, despite its value in the accumulation stage of life, is not sufficient to protect you and your money.
  • Measure your retirement sustainability quotient (RSQ) and your Financial Legacy Value (FLV)-then choose a retirement income plan on the Retirement Income Frontier.
  • Understand how product allocation differs from asset allocation, how to allocate your nest egg across three product silos, and learn about the new financial products that are available to protect against the new risks you face.
  • Follow a seven-step process to close your Pension Income Gap and convert your retirement savings into a secure stream of lifetime income.
Whether you do it yourself or work with a financial advisor, Pensionize Your Nest Egg gives you a simple plan to create a guaranteed retirement income-for life.

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Pensionize Verb. 1. To convert money into income you can't outlive. 2. To create your own personal pension, a monthly income that lasts for the rest of your natural life. With the subpar performance of the markets, record-high personal debt levels, and shockingly low savings rates, it's clear that many Canadians expecting to retire in...

From the Jacket

PensionizeTM Verb. 1. To convert money into income you can't outlive. 2. To create your own personal pension, a monthly income that lasts for the rest of your natural life. With the subpar performance of the markets, record-high personal debt levels, and shockingly low savings rates, it's clear that many Canadians expecting to retire ...

MOSHE A. MILESKY, Ph.D., is an author, researcher and professor at York University in Toronto, Canada. ALEXANDRA C. MACQUEEN is a Certified Financial Planner professional who works as a project manager at The QWeMA Group in Toronto, Canada.

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Format:PaperbackDimensions:256 pages, 8.9 × 5.91 × 0.43 inPublished:August 30, 2010Publisher:WileyLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0470680997

ISBN - 13:9780470680995

Reviews

Rated 5 out of 5 by from Most important book to read this year Pensionize Your Nest Egg is a must-read for anyone interested in securing a stable retirement income. I make no pretense of objectivity. I know one of the authors from the Canadian Money Forum, and she's as gracious and insightful in print as she is online. The book is split into three sections. The first section deals with pension basics such as defined benefit vs. defined contribution plans, the looming pension crisis, and the definition of pension. This section also deals with the major risks in securing retirement income: longevity risk, sequence of returns, and inflation. In defining pension (guaranteed, lifelong income stream), the authors ask a discomfiting, but necessary, question. If your employer/pension sponsor can renege on your pension benefits by declaring bankruptcy, do you actually have a pension? The authors' emphatic answer is no. Fortunately, the authors offer solutions for all of the above in part 2. The second section deals with products that address the above problems. The authors do not endorse any particular company but introduce the concept of “product allocation.” Most are familiar with asset allocation, which determines the ratio of fixed-income to equities within a portfolio. “Product allocation.” on the other hand, refers to choosing types of financial products that address the risks cited in part 1. The authors describe 3 “silos,” or types of products, to purchase with your nest egg to deal with risks. One silo is composed of traditional investments like stocks, bonds, and mutual funds. Products in this silo can grow (if the market does well!) to provide inflation protection, liquidity, and a financial legacy. However, products from silo 1 may not provide sustainable lifetime income (unless you invest very well or have a large sum) and are subject to “sequence of returns” risk (early negative returns can reduce an investor's sustainable income). Silo 2 comprises products guaranteeing lifetime income i.e. address “longevity risk.” the risk of outliving your savings. CPP is an example of an annuity-type product. Defined benefit pensions are another form of lifetime income. Indexed annuities can also deal with inflation risk but at the cost of lower initial payments. These products also deal with “sequence of returns” risk. However, these products have disadvantages too. The annuity contract is irreversible (i.e. illiquid), and, if markets do especially well, future growth accrues to the insurance company, not you. Another problem is “counterparty risk,” the risk that the other party/ company won't live up to its commitments. However, that risk exists already in defined benefit plans (just ask former Nortel employees). Also, insurance companies are closely regulated in Canada. Silo 3 consists of hybrids like guaranteed lifetime withdrawal benefit (GLWB) products, which are mutual/ segregated funds that guarantee a minimum withdrawal rate (usually 4-5%). As expected these products provide intermediate risk protection. They provide inflation protection and growth potential, but not as much as products from silo 1 (costs are higher for GLWB products). They offer protection from longevity risk, but not as much as an annuity. Part 3 moves from theory to practice and gives the reader a step by step guide to pensionize retirement savings. The authors introduce the concepts of Wealth to Need ratio (WtN) and retirement sustainability quotient (RSQ). The WtN ratio is simply your needed annual retirement income divided into your total nest egg. The wealthier you are (or the lower your spending), the higher your WtN is. RSQ measures the likelihood your retirement will last your lifetime and is defined as fraction of pensionized income (e.g. annuity or DB plan) + fraction non-pensionized income X (1 – risk of portfolio ruin). “Portfolio ruin” is the risk that your portfolio will be exhausted. The higher your RSQ is, the more sustainable your retirement income is. If you browse the finance category, you'll see tens of thousands of books on personal finance and thousands on investing, but I can think of only one that tells Canadians how to guarantee their retirement income – all for less than the cost of an average haircut! Do yourself a favour. Quit worrying about your future. Buy this book and plan it instead.
Date published: 2010-09-26

Extra Content

Table of Contents

Preface.

Introduction: Why Retirement Income Is Better than Retirement Savings.

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

Chapter 1 The Real Pension Crisis.

Up a Creek Without a Pension Paddle.

Mixing Defined Benefit Apples and Defined Contribution Oranges.

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

Guarantee versus Ruin.

When Is a Pension Not a Pension?

There Ain't No Such Thing…as a Free Pension.

The First True Pensions.

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

The Grim Reaper's Coin Toss.

Introducing Longevity Risk.

Predicting the Future of Longevity.

How Should You Insure Against Longevity Risk?

Will You Get Heads…or Tails?

Chapter 3 How the Sequence of Returns Can Ruin Your Retirement.

How Long Will the Money Last?

Clockwise Investment Returns.

Counter-Clockwise Returns.

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

Can Buckets Bail Out a Poor Sequence of Returns?

Would Saving More Save Your Retirement?

Chapter 4 Inflation: The Great Money Illusion.

What Does This Mean for Retirees?

The CPI-ME and the CPI-YOU.

Does the CPI Measure YOUR Spending?

A Reality Check for Your Retirement Spending?

What Did We Learn So Far?

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

Chapter 5 Beyond Asset Allocation: Introducing the New Science of Product Allocation.

Product Allocation: New Baskets for Your Nest Egg.

Three Product Silos.

The Spectrum of Retirement Income Silos.

How Do the Silos Stack Up?

Chapter 6 An Introduction to Life Annuities.

Pension Contributions as Insurance Premiums.

Buying a Personal Pension.

Converting Your Nest Egg to Retirement Income.

When Should You Buy an Annuity?

Annuities versus GICs.

Is the Annuity Gamble Worth It?

Great-Grandma's Gamble.

The Power of Mortality Credits.

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

What about Interest Rates?

How Can I Use Annuities to Protect against Inflation?

Unique and Peculiar Insurance.

Chapter 7 A Review of Traditional Investment Accounts.

Asset Allocation in Your SWP.

What Should You Put in the SWP?

Chapter 8 Introducing the Third Silo—Guaranteed Lifetime Withdrawal Benefit Products.

Guarantees and Growth: How GLWBs Work.

GLWBs: Issuers, Features, and Benefits.

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

Which Glasses Will You Wear?

How Many Eggs Can You Withdraw from Your Nest?

What Should You Protect Against: Floods or Meteorites?

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

Pensions Change Game.

How Does Pensionization Impact Your Retirement Sustainability Quotient?

Pension Annuities: Step-by-Step Math.

The True Gift of Pensionization.

Chapter 10 The Most Difficult Question You Will Ever Have to Answer (About Your Retirement).

Retirement Sustainability or Financial Legacy?

Pricing Your Inheritance.

Finding Your Spot on the Frontier.

Chapter 11 Divvying Up Your Nest Egg.

What is the Cost to Pensionize?

When Should You Pensionize?

Summary of Part II.

PART III THE SEVEN STEPS TO PENSIONIZE YOUR NEST EGG.

Chapter 12 Step 1: Identify Your Desired Retirement Income.

Step 1 - Identify Your Desired Retirement Income.

Estimating Your Desired Income from the Top Down.

Estimating Your Desired Income from the Ground Up.

Recap of Step 1.

Chapter 13 Step 2: Estimate Your Existing Pensionized Income.

Canada's Public Pensions.

Old Age Security.

The Guaranteed Income Supplement.

The Quebec and Canada Pension Plans.

How Much Will You Receive?

Benefits from a Defined Benefit Pension Plan

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

Timing the Retirement Decision.

Completing Step 2.

Recap of Step 2.

Chapter 14 Step 3: Determine Your Pension Income Gap.

Your Average Tax Rate.

Your Pension Income Gap.

Adjusting for Inflation.

Recap of Step 3.

Chapter 15 Step 4: Calculate Your Retirement Sustainability Quotient.

What Kind of Eggs Do You Have in Your Nest?

Filling the Gap.

Recap of Step 4.

Chapter 16 Step 5: Assess Your Plan: Is It Sustainable?

Recap of Step 5.

Chapter 17 Step 6: Calculate Your Financial Legacy Value.

Recap of Step 6.

Chapter 18 Step 7: Use Product Allocation to Pensionize the Right Fraction of Your Nest Egg.

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

Step 1: Identify Your Desired Retirement Income.

Step 2: Estimate Your Existing Pensionized Income.

Step 3: Determine Your Pension Income Gap.

Step 4: Calculate Your Retirement Sustainability Quotient.

Step 5: Assess Your Plan: Is It Sustainable?

Plan A: Spend Less.

Plan B: Pensionize a Fraction of Your Nest Egg by Buying an Annuity.

Step 6: Calculate Your Financial Legacy Value.

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

Summary of Part III.

Final Thoughts.

Notes.

Bibliography.

Acknowledgements.

About the Authors

Index.