Retirement for the Record

Just in case you’ve ever wanted to read a book about both retirement planning and the music of the 60s and 70s, Daryl Diamond has you covered with Retirement for the Record: Planning Reliable Income for Your Lifetime … to the Soundtrack of Your Life.  This book’s main focus is the value of an advisor (and his firm in particular) in retirement financial planning.  However, about a third of it is stories about the music most relevant to those born near the peak of the baby boom.

I expected more discussion of how to plan your finances in retirement, but the consistent message is that such planning is difficult, you need help, most advisors aren’t good at it, but Diamond and his firm do it well.  An early chapter tells us that there are no cookie cutter solutions, because the answer to most retirement planning questions is that “it depends” on your particular circumstances.  There is some truth to this, but it would certainly be possible to lay out 6 or 8 examples that illustrate the most important themes of planning a person’s retirement.  Unfortunately, Diamond doesn’t do this.

“I have seen plenty of situations where a DIY investor is trying (trying is the operative word here) to efficiently set up their income streams and in the process ends up sabotaging a preferable outcome. Unfortunately, I meet far too many ‘do-it-yourself investors’ who aren’t doing a good job transitioning to the income years themselves and, realizing this, are seeking my help at this point in their life.”  Of course, he doesn’t see any DIYers who plan their retirement well, because they don’t go to see him.  Given the repeated pitches for advisors and his firm in particular, this whole message just comes off as self-serving.

To show the complexity of retirement financial planning, Diamond lists ten questions that must be answered before it’s possible to tailor a plan to a client’s needs.  Unfortunately, he doesn’t discuss what he would do with the answers.

The Good

Before continuing with criticisms of this book, let’s look at a few parts I liked.  To avoid big tax bills in the future, it often makes sense to start drawing from RRSPs early instead of waiting for mandatory RRIF withdrawals to begin.  “To the best of my knowledge, only one of the Big Five banks allows their planners to illustrate scenarios in which RRSPs are not deferred as long as possible.”  Aside from the problem of possibly giving bad advice to clients, how can planners within big banks be considered professionals if they must do what their bosses tell them to do even if it hurts clients?

Diamond gives a good discussion of the importance of line 23600 (net income) on Canadian tax forms.  This net income figure determines your OAS clawback and the value of your age amount and age credit (for those 65 and older).  Many people don’t realize that if you carry capital losses from previous years forward to offset capital gains in the current year, it reduces your taxes this year, but it doesn’t change line 23600.  So, previous capital losses can’t reduce your OAS clawback or increase your age amount.

There’s nothing wrong with deciding to become more conservative with your investments, but too many investors do this “at precisely the wrong time.”  Investors who get conservative after stocks have crashed “lock in their losses,” “experience lower returns than if they had stayed invested,” “miss the subsequent upturn in the markets,” and “need to decide when to enter back into the markets—and this happens after they have already missed meaningful gains.”

The Not So Good

In a chart showing the “factors for successful investing,” the claimed least important factor is “fees.”  Even a 1% annual fee will consume about one-quarter of the assets you accumulate and decumulate over an average lifetime, so it’s hard to see how fees are unimportant.

Diamond is adamant that most people should take CPP and OAS as early as possible thereby “preserving your personal income-producing assets.”  Unfortunately, his reasons for this mostly come down to focusing on the possibility of dying young.  “I can tell you that over the last eighteen months we have unfortunately had twenty of our clients pass away.”  “Fifteen passed before the age of 71.”  Of course, there are many who are still alive and will live long lives.  Frederick Vettese’s take on when to start CPP in his book Retirement Income for Life (second edition) makes more sense.

One chapter warns what could happen if you’ve delayed CPP and OAS, but one spouse dies.  In this case, that spouse’s CPP and OAS get replaced with a smaller CPP survivor pension.  In one example, a widow sees her income drop 25%, an apparently disastrous outcome.  However, her expenses will drop as well.  It’s important to actually analyze a couple’s spending to see how it would change if one spouse died. Instead, Diamond treats any income drop as a calamity, and declares that almost everyone should take CPP and OAS as early as possible.  In reality, the possibility of living a long life and needing to avoid running out of money have to be considered together with other possible outcomes.

When fees are based on a percentage of client assets, “the better the portfolio performs, the better it is for the client and for the advisor.  There is an alignment of interests in this arrangement, which is why we prefer it and it is the model we use in our firm.”  The alignment of interests is pretty weak with this arrangement.  We get much better alignment when advisors hold the same assets in their personal portfolios as they recommend for their clients.

In a rant about fee disclosure and HST, Diamond writes “While the government contends that it is so interested in fee disclosure and the desire to ‘help’ investors, they are certainly not shy about carving money out of your returns in the form of taxes [HST on management fees and dealer fees].”  I’m not convinced that this HST only affects investor returns.  What if managers and dealers already charge as much as they can get away with, and they would just raise their fees if the HST went away?  Then the HST bites into their fees rather than investor returns.  In reality, this HST affects both sides: investors and managers and dealers.

An entire section of the book devoted to “investing in retirement to generate income” can be summarized as “we use income funds.”  Diamond stresses the importance of “preserving the invested capital” by spending only income and not selling units of the income fund.  However, income fund managers sell capital within the fund to make up part of the promised payments.  This is called return of capital (ROC).  The claim that your “capital can remain invested” is at best misleading.  Diamond views ROC “as a component of this managed investment process that generates regular income.”  This is just double-talk to disguise the fact that income funds don’t really preserve capital.

Diamond advocates a 5% to 5.5% withdrawal rate in retirement.  This is dangerously high, particularly when you’re also paying advisor fees, but has worked out well during the bull run in stocks over the past decade or so.  Who knows what will happen in the coming decade.  Something I didn’t see mentioned is increasing the withdrawal rate with age.  An early retiree certainly should be drawing less than 5%, and an 80-year old can safely draw more than 6%.

Conclusion

Overall, I’m not a fan of the retirement planning part of this book; I found it self-serving for the author.  He could have actually explained his process to help other advisors and maybe some DIYers.  However, it’s clear that Diamond has great passion for the music of his youth.  Readers of the right age (baby boom peak) may enjoy his many interesting music-related stories and trivia questions.  Even though I’m significantly younger than the author, I enjoyed the music discussions more than the retirement planning.