Book Review of

Are You a Stock or a Bond?

By Moshe Milevsky

Dr Milevsky does an excellent job discussing the dual uncertainties of retirement planning: uncertainty of longevity, and uncertainty of portfolio duration. Both deal with trying to determine how long you or your money may last, while recognizing that both time periods need to overlap – in fact one might argue that the portfolio time period needs to be nanoseconds (ideally with perfect knowledge) longer than your longevity. The human capital approach is excellent since it relates the long term economic value of a person’s labor, as a total dollar value; to the total dollar value that person needs to sustain their living standard throughout retirement.

There is controversy in the profession concerning the allocation of assets considering the nature of a person’s source and nature of their income along with those assets. However, putting concepts out there for discussion is how incremental improvements occur. Another controversial approach has been forwarded in Spend ‘Til the End: The Revolutionary Guide to Raising Your Living Standard–Today and When You Retire by Laurence J. Kotlikoff and Scott Burns. Their approach is to smooth your spending over your entire lifetime. Dr Milevsky’s approach is to determine how to sustain it. The theme of both works is how to evaluate your standard of living and then how to sustain it in the long run.

Dr Milevsky’s formula and excel spreadsheet use is very useful for most people. In practice though, most people would have a hard time determining an expected return and standard deviation for their portfolio especially considering this is a value they expect for the rest of their life. Median remaining lifespan (MRL) also means there’s a 50/50 chance of living beyond the period evaluated. A person would reduce the chance of outliving their assets if they used a lifespan factor than had a lesser chance of being outlived. He acknowledges the fact that the older you get, the older you are likely to get in Chapter 7. However, he does not provide the mathematical means in his discussion (even as an appendix) to adjust for this factor should one want to plan more conservatively. One may argue that you would adjust the MRL as you age. However, that would mean that a person is overspending early and would need to retrench their spending as they age, because they would need to stretch the spending farther than what the plan called for originally – once retired there is no replenishment of assets that are already spent.

His book The Calculus of Retirement Income: Financial Models for Pension Annuities and Life Insurance goes into greater detail about the calculus that supports this book.

A final note: the use of variable annuities with their riders is, as yet, untested as to whether the companies selling them can withstand the test of time for both markets and demographic forces. Demographic changes are an important consideration since variable annuity riders are structured where people need to pay in more for the benefits than the benefits that are paid out (the theme sounds much like the Social Security or the pension phenomena he describes in his introduction).

Putting the nit noy of these aside, this is an excellent primer for most people about the issues they face for retirement. Using the concepts here will do more good than harm for most do it yourselfers.

This review was compiled by Larry R. Frank

A recent publication from the C.D. Howe Institute entitled “Faster, Younger, Richer? The Fond Hope and Sobering Reality of Immigration’s Impact on Canada’s Demographic and Economic Future”, presented a number of interesting points that members of the Canadian boomer generation should be aware of.   You can view the report at the C. D. Howe website (www.cdhowe.org).

The report’s focus is clearly on immigration and the demographic challenges facing Canada – basically a slow growing and aging population.  At the same time the report highlights some issues that should be of concern because it may impact the Canadian boomer generation directly – namely our desire to maintain and enhance our living standards.

One element of the report of interest to boomers is the Old-age Dependency ratio (OAD).  This is the ratio of Canadians aged 65 or greater compared to Canadians aged 18 to 64.  The OAD has been rising since 1971 and will enter a period of steeper increases around 2012 as more boomers pass the age of 65.  This shouldn’t be a surprise as we all should be aware of the fact that there is a boomer bubble – a large percentage of the Canadian population are baby boomers and this group is fast approaching the age of 65.  It is commonly believed that the higher the OAD ratio, the greater stress is placed on the generations below to support a large older generation.  This will no doubt impact many aspects of the boomer generation – fewer Canadians supporting more older Canadians could result in less for all across the country……lower economic growth, fewer social benefits, etc., thus impacting many things we have become accustomed to and expect to be there for us boomers.

The report presents a case for major policy reforms to mitigate the impact of the slower growing and aging population.  We can’t rely on immigration to bring in enough people to sustain our expected Canadian lifestyle and fully support our aging population.  The report indicates that these policy changes may have more impact than simply increasing immigration.  The changes to be made include:

• postpone retirement to age 70
• increased fertility, at least to the replacement level
• boost productivity growth

Impacts on the Canadian boomer generation ………  we may have to work longer in full time or part time capacities, we may have more grandchildren and/or great-grandchildren if fertility rates increase, we have to produce more output per workforce member ……… each of these will directly affect us as we age.  We will have to wait to see what these impacts may be but Canadians clearly have some issues to deal with, and the baby boomers specifically have some thinking to do.

There is a benefit to all Canadians in keeping Canada young.