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Morneau Shepell chief actuary Fred Vettese suggests employing ‘defensive strategies,’ including waiting as long as possible to take your Canadian government pension, to make your money outlast you.Fred Lum/The Globe and Mail

You're a year into retirement and you assume you're doing everything right.

Saved $500,000? Check. Drawing the minimum from your registered retirement savings plan (RRSP) so the majority stays invested and earns tax-sheltered income? Check. Taking your share of the Canadian Pension Plan and Old Age Security as soon as you're allowed to? (You know what they say about a bird in the hand.) Check.

But according to 2016 data, what seems like solid retirement planning may actually be the wrong move, particularly for retirees who are worried about facing a bear market in the coming year. While today's markets remain relatively buoyant despite political uncertainty in the United States, there's always the worry that another careening drop is just over the hill.

"There is a totally plausible scenario where people think they are doing all the right things, but actually run short of money by age 75," says Fred Vettese, chief actuary at Morneau Shepell, a human resources consulting and technology firm, and author of The Essential Retirement Guide: A Contrarian's Perspective.

In 2016, Mr. Vettese conducted in-depth analysis of decumulation (spending those retirement dollars) and investment risk in Canada. Running Monte Carlo simulations, which model the probability of various outcomes, he found there is likely a better way to mitigate risk that ensures retirees don't outlive their savings even when faced with a worst-case scenario.

It all comes down to employing what he calls "defensive strategies."

Strategy No. 1

Don't take your government pension until you absolutely have to. Instead, deplete your retirement savings first. Here's why: If you defer C/QPP until 70, you'll be paid as much as 50 per cent more (depending on wage inflation) than if you'd taken it earlier. And that's guaranteed money for life, no matter how high or low the markets swing.

Sure, you'll be going against the grain – fewer than 1 per cent of retirees start their C/QPP pension at 70, Mr. Vettese says – but the strategy is a smart move for alleviating investment and longevity risk.

What's more, during a bear market when investment returns drop, deferring has even more of an impact.

"The government increases your CPP between 65 and 70 based on a certain set of assumptions," he says. "One is that you're going to get a 5- or 6-per-cent return on that money. But if you don't get that – if you have no return at all – deferring ends up being a much better strategy."

Strategy No. 2

As a hedge, allocate 30 per cent of savings at 65 to the purchase of an annuity, a contract with a life insurance company that pays a guaranteed income for a set amount of time, or even for life. The downside is that once you die, payment stops and there's nothing for the estate, unless you set it up that way. The upside: You've still got 70 per cent of your investments in assets, but with less equity exposure.

Strategy No. 3

Pay more attention to fees. By using low-cost exchange-traded funds that charge 50 basis points versus the more typical 175 basis points financial institutions charge, retirement savings last longer. It's a small adjustment with a long-term impact – particularly crucial as retirements last 20 or even 30 years.

Although it seems counterintuitive to draw from savings right away while leaving government money on the table until 70, the numbers say otherwise. Mr. Vettese ran simulations using a couple, Carl and Hanna, who had saved $500,000 and implemented the traditional retirement strategy. While they were okay so long as the markets held steady, if there was a drop similar to 2008, their nest egg disappeared by 75 and they were left destitute.

"A pension pundit will look at that and say, 'Well, obviously these people didn't have enough for retirement and the lesson is you've got to save more,'" he says.

Not necessarily. If they had tried the defensive strategies, which also included two extra adjustments, the story turns out differently. Carl and Hanna mapped out their expenditures for 10 years and discovered their retirement income target was closer to 50 per cent of their final average pay. Not the 70 per cent that many financial experts espouse. The couple also considered that spending slows as we age. They would need less money after 75, not more. That's what they banked on.

In this second scenario, the couple's $500,000 savings turned out to be more than enough for life, lasting until Hanna died at 95.

Of course there are other ways to mediate investment risk in the golden years. Cynthia Kett, a veteran financial planner with Stewart & Kett Financial Advisors Inc., an advice-only firm in Toronto, says she creates five- to seven-year projections and creates year-by-year benchmarks as retirement draws near.

She also recommends that clients have a minimum of five to seven years of cash flow available and saved in fixed income so they'll never have to draw down on equities at inopportune times. The thinking goes that markets nearly always rebound within that time.

"We want to have enough cash flow on hand so that if it's a bear market when you retire, oh well. So it is. We can wait that out," she explains.

Creating a guaranteed income stream is important as more Canadian companies move away from offering gold-plated defined benefit plans to defined contribution plans, which move the risk to the employees. Mr. Vettese says he'd like to see companies do more to help these employees as they reach retirement age and the plans mature.

"Why would they carry them in the plan for 35 years until the point of retirement and then just before the employees cross the finish line, they tell them, 'Go figure things out?'" he asks.

Ms. Kett explains that many companies are worried about assuming legal liability for the financial advice employees receive through the workplace. It's easier to simply tell employees to hire their own planner. Another option and fair compromise? Offer a retirement planning allowance instead. Employees receive funds to pay for the planner they choose.

That option is far better than having a planner meet with a roomful of employees giving general information, but not personalized advice.

"Advice really can't be provided unless a planner understands all the background information about your situation and then advises you," she says.

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