Author Archives: Brian Poncelet

Forget the 4% Withdrawal Rule

Article credits to the authors – Donna Rosato and Penelope Wang.

Choppy markets and rising health care costs needn’t stop you from having the money for the retirement you want. We asked five of the brightest minds in retirement planning for their big ideas to help you cruise through the obstacles.

Below, advice from our first expert, Wade Pfau, an economist who studies retirement strategies.

Big idea: The most important retirement rule has changed

Almost every asset you can invest your nest egg in now looks expensive by historical standards. What’s more, argues Wade Pfau, this has big implications for how you draw down from your savings the money you need to live on. If he’s right, it throws one of the best-known retirement guidelines right out the window.

When Pfau, a professor of retirement income at the American College for Financial Services, says both stocks and bonds are expensive, he isn’t predicting an imminent crash — the Ph.D. economist is a number cruncher, not a tea-leaf-reading market forecaster. But he argues that basic math suggests asset prices have less room to rise, meaning the long-run outlook is for lower returns ahead.

Based on studies of stock and bond returns since 1926, financial planners had settled on a benchmark for how much a retiree could spend each year without fear of running out of cash. It turned out that a person who invested half in stocks and half in bonds could spend 4% of his or her wealth in the first year, adjust that dollar amount for inflation in subsequent years, and still have money 30 years later. That worked in every historical 30-year period, as well as in most computer simulations based on the historical rate of return. Even drawing a hefty 5% worked more often than not.

But without strong stock and bond returns to help refresh your nest egg as you spend from it, those old numbers can’t be relied on, argues Pfau.

“The probability that a 4% withdrawal rate will work in the future is much lower,” he says. His new safe starting point: a 3% drawdown. That means that if you’ve saved $1 million, you’re living on $30,000 a year before Social Security and any other sources of income you might have, not $40,000. Ouch.

You may be relieved to hear that Pfau’s idea is controversial. Michael Kitces, partner and director of research, Pinnacle Advisory, who has worked with Pfau on other research (more on that later), is one of many experts who think that the long historical record is still a decent guide to the future.

Yet William Bengen, the planner who in 1994 came up with the 4% rule, says some rethinking may be in order. “I think Pfau has done a great job of looking at the issues,” he says. “Market valuations are important, and he may be right.”

Here’s the story the numbers tell, according to Pfau: The 10-year Treasury recently yielded only 2.6%, compared with its 3.5% historical average. Current 10-year yields generally tell you the total return you can expect over the next decade. (Even if yields go up from here, today’s owners of bonds will suffer a loss of capital, since bond prices fall when yields rise.)

As for stocks, large companies listed on the S&P 500 index are priced at 25 times their averaged earnings over the past decade, according to measurements by Yale economist Robert Shiller. This gauge stands significantly above its average of 16. When Shiller’s price/earnings ratio is high, lower returns typically follow over the next 10 years.

As a result, Pfau estimates a fifty-fifty portfolio of stocks and bonds is likely to deliver a long-run annual average return after inflation of just 2.2%, less than half the historical rate. In a study with Michael Finke of Texas Tech and David Blanchett of Morningstar, Pfau found that with returns in that range, taking an inflation-adjusted $40,000 year out of a $1 million portfolio will drain your assets about 57% of the time, depending on the pattern of good and bad years. (More bad years early mean you will be more likely to run out.) Ratcheting back to $30,000 lowers to 24% the chance you will outlive your savings.


Save more if you can. That’s the easy takeaway from Pfau. Not that it’s easy, especially if you are close to retirement. To get $40,000 from a 3% withdrawal rate, for example, you’ll need $1.3 million instead of $1 million. Working longer can help, but it won’t fill all the gap. Other adjustments you can make, however, can take the sting out of Pfau’s message.

Do you have a Benefits Plan?

Take the stance that they don’t need benefits because their spouse has benefits where they work and their spouse usually works at a big company that has a fantastic benefits plan.

This is absolutely perfect logic for some SmallBiz owners to not set up a benefits plan. Having said that, there are a few good reasons to set up a SmallBiz benefits plan even if the SmallBiz owner’s spouse has benefits:

  • The spouse’s plan may not cover everything!
    • In this case, such items as Orthodontics, Vision Care, 80% or 90% Reimbursement levels, or even Paramedical Maximums may have the SmallBiz owner reaching into their pocket. Implementing a SmallBiz benefits plan is a more tax-effective way to pay for those additional expenses. Being a SmallBiz owner myself, I set up a Health Care Spending Account so as to help pay for one of our son’s orthodontics the least couple of years; all 4 of us require prescription eyeglasses/contacts; and her company’s $500 Dental max can be a challenge.
  • The spouse’s plan will only cover health and dental!
    • If the SmallBiz owner is looking to have some Disability coverage or additional no-medical Life insurance, then implementing a SmallBiz benefits plan could be the answer. Traditional Group Insurance provides Disability coverage as an optional add-on.
  • The SmallBiz owner can opt out!
    • Sometimes, the SmallBiz owner comes to the conclusion that they want to implement a benefits plan but the cost of the plan they want for their employees is cost-prohibitive. Depending on the number of employees, if the SmallBiz owner opts out because they have coverage elsewhere, the benefits plan cost could be reduced by as much as 50%! Just another reason to implement a SmallBiz benefits plan.
  • The Spouse’s employment situation may change!
    • The SmallBiz owner may have set up a benefits plan and opted out of the Health and Dental but if their spouse loses their job…and their benefits…it is very easy to seamlessly (no medical required) enroll themselves onto their SmallBiz benefits plan. There are many different questions that a SmallBiz benefits plan provides answers for.

If any of these situations make enough sense to you that you wish to further explore implementing a SmallBiz benefits plan, then connect with a Specialist like Brian Poncelet at

Does your auto insurance cover you outside Ontario?

Motorists who drive outside of the province or country will wonder if their insurance policies automatically provide coverage when driving in the U.S. and Mexico.

Most basic automobile insurance policies (for Ontario drivers) contain provisions that will cover motorists if they are involved in an accident in another province or in the U.S.

A Standard Ontario Motor Vehicle Policy includes a set of “no-fault” benefits which are available to the insured Ontario motorist if an accident occurs in Ontario, in another province or in the U.S. These no-fault benefits include:

  • Income replacement benefits, non-earner or caregiver benefits
  • Medical/rehabilitation benefits
  • Attendant care benefits
  • Lost educational benefits
  • Death and funeral benefits
  • Expenses of visitors
  • Reimbursement for damaged clothing, glasses and medical devices

Depending on the severity of the injury, potential benefits for housekeeping and home maintenance expenses

In most U.S. states, motorists are not required to carry minimum liability insurance, whereas in Ontario, the minimum liability coverage is $200,000. If you plan on driving in the U.S., you may want to increase your minimum liability coverage.

Fortunately, all Ontario auto insurance policies contain a provision for uninsured automobile coverage, which protects insured Ontario motorists and certain family members to the limit of their own insurance liability coverage in the event that an accident is caused by someone who has no insurance coverage.

U.S. isn’t backing down on Canadian plane maker

In October, Commerce issued preliminary findings that called for levying a pair of tariffs totaling nearly 300% on imports of single-aisle Bombardier C Series airliners.

Boeing, the American aerospace giant, claims it was harmed by the new Bombardier plane, alleging Bombardier unfairly benefited from bailout subsidies from the Canadian federal and provincial governments. Boeing claims those funds allowed Bombardier to sell its new C Series airliner to Delta Air Lines at “absurdly low prices” in violation of U.S. trade rules.

Delta in 2016 ordered up to 125 110-seat C Series jets for its fleet. Deliveries were expected to begin in spring 2018, but those plans are in question pending the outcome of the case.

The ongoing case has already disrupted deals between Boeing and Canada.

The Canadian government last week decided to purchase used F/A-18 Hornet fighters from Australia rather than buy 18 new Boeing Super Hornets. Canadian Prime Minister Justin Trudeau had threatened to nix the proposed $5.23 billion deal with Boeing as long as the trade case continued.

The spat has pushed Bombardier and Boeing’s European rival Airbus close together. The pair agreed in October to form a partnership giving Airbus a 50.01% stake in the jetliner program and announced plans to build C Series jets on a second assembly line in Mobile, Alabama.

Bombardier and Airbus claim jets assembled in the U.S. would not be subject to any tariffs, but Boeing disagrees saying the tariffs would should similarly apply to “partially assembled” planes manufactured in U.S. factories. Delta’s Chief Executive said the airline has no intention of paying the 300% tariff on its new jetliners.

The tariffs would increase the price of each jet for Delta or any U.S. airline by almost four times, effectively rendering them not economically viable.

U.K. officials have warned that the tariffs could threaten 4,100 jobs at plants in Northern Ireland making parts for Bombardier.

The Commerce Department pointed out Wednesday that Bombardier, the Canadian Government and Boeing “agreed that the proposed transaction between Bombardier and Airbus does not impact these investigations.” That deal isn’t expected to be finalized until the second half of 2018.

Buying a new smartphone?

The biggest challenge for consumers, experts agree, is predicting data usage and its impact on service cost.

“In terms of estimating personal data usages, it’s very difficult because it’s abstract,” said University of Ottawa assistant law professor Marina Pavlovic.

For example, it’s hard to know how many gigabytes of data will be used to show a single YouTube video — let alone how many videos, photos, text messages, emails and internet searches will accumulate during a billing cycle.

Another difficulty, which may be reduced under recent regulatory changes, has been service contracts that allow data to be shared among multiple devices with different users, such as parents and their children.

Maker said extra fees on shared plans has been one of the most common complaints to the CCTS, which oversees the wireless industry’s code of conduct on behalf of the Canadian Radio-television and Telecommunications Commission.

A revision to the wireless code, announced by the CRTC in June, was to address that problem by requiring service providers to notify account holders of overages from all devices and authorize only them to consent to extra fees.

But two of Canada’s largest wireless service providers — Rogers and Telus — were unable to comply with that requirement by the Dec. 1 deadline and asked for several additional months to adjust their billing systems.

Pavlovic — one of the lead authors of a research study presented to the CRTC last year, as it was preparing to update the wireless code — believes it still requires consumers to spend too much time and energy to avoid bill shock.