Certified financial planner Alexandra Macqueen joins the podcast to discuss the distinction between financial economics and financial planning, retirement sustainability quotient (RSQ), financial legacy value (FLV), annuities, GIC ladder, copycat annuities, and considerations for deferring CPP.
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Quick takeaways
Financial planning is often based on rules of thumb and folklore, while financial economics is more rational and quantitative.
Product allocation in retirement planning involves incorporating different products, such as annuities, to mitigate risks and create a steady stream of income.
Deep dives
The distinction between financial economics and financial planning
The podcast episode explores the difference between financial economics and financial planning. Financial economics is an academic discipline that focuses on the efficient allocation of resources under conditions of uncertainty. Financial planning, on the other hand, is often governed by rules of thumb and folklore rather than quantitative thinking and rational economic principles.
Product allocation and its importance in retirement planning
The podcast highlights the concept of product allocation in retirement planning. While asset allocation is commonly discussed, product allocation focuses on incorporating different products into a retirement portfolio. As individuals transition into retirement, they face new risks such as longevity risk. Product allocation involves adding specific products that help mitigate these risks and create a steady stream of income, such as annuities.
The trade-off between retirement sustainability and financial legacy
The podcast discusses the trade-off between retirement sustainability and financial legacy value. The retirement sustainability quotient (RSQ) measures how sustainable an income source is over an expected lifetime, while the financial legacy value (FLV) refers to the amount of wealth that can be passed on to future generations. Increasing the retirement sustainability may reduce the financial legacy, and vice versa. The episode emphasizes the importance of finding a balance between these two factors based on individual preferences.
The benefits and considerations of annuities in retirement planning
The podcast explores the benefits and considerations of annuities in retirement planning. Annuities provide a guaranteed stream of income, which can provide financial security for individuals worried about longevity risk and potential declines in standard of living. Moreover, annuities can allow individuals to spend more of their overall capital and take more risk with the remainder of their portfolio. However, the decision to purchase annuities should be carefully evaluated based on personal preferences, tax considerations, and factors such as the individual's eligibility for other sources of income like the Canada Pension Plan (CPP).
Welcome to another episode of the Rational Reminder Podcast! We have a fantastic guest joining us today to talk about annuities, or in more general terms, pensionization. Alexandra Macqueen is certified financial planner, who is also a financial author, editor, York University educator, consultant, and speaker. Alexandra co-wrote a book with Dr. Moshe Milevsky called Pensionize Your Nest Egg:How to Use Product Allocation to Create a Guaranteed Income for Life, an incredible resource on our topic today. In this episode, Alexandra talks about the important distinction between financial economics and financial planning, the former being much more rational and quantitative than the latter, which is largely based on folklores and rules of thumb. We discuss the concepts of retirement sustainability quotient (RSQ) and financial legacy value (FLV) and the impact they have on each other, before diving into explaining what annuities are and how they are meant to function. She also advises on the use of the GIC ladder, copycat annuities, and considerations for deferring your CPP. Don’t miss out on this insightful conversation!
Key Points from This Episode:
The distinction between financial economics and financial planning. [0:02:38.8]
Product allocation and how it relates to pensionization. [0:04:15.8]
The retirement sustainability quotient (RSQ) and what it measures. [0:06:46.3]
How the RSQ affects your financial legacy value (FLV). [0:07:45.7]
The idea of eliminating the probability of ruin from your portfolio. [0:09:39.6]
What exactly is an annuity and how does it work? [0:10:15.3]
The type of person and age group that annuities appeal to. [0:13:53.2]
Why allocating to an annuity can allow you to spend more on your overall capital. [0:16:20.0]
The problem with the folklore rules around appropriate withdrawal rates. [0:19:47.8]
Suggestions for annuities for wealthy people under 50. [0:23:08.3]
Why a GIC ladder is not a guaranteed stream of income. [0:26:04.9]
Defining copycat annuities and their accompanying issues. [0:30:57.6]
CPP and the impact of deferring it at retirement. [0:33:52.4]
And much more!
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