Peter Boys, Boys Financial Services

The Math Behind A Successful Retirement

Whats Your Plan

One of the perks of holding various industry-related memberships is the luxury of gaining access to proprietary interviews with influencers.  A recent interview with one such industry expert emphasized some sobering points about the math behind a successful retirement, and prompted some spontaneous research into the viability of guaranteed retirement income, otherwise known as an annuity.

Spoiler Alert

There’s a single common denominator for every conversation around retirement and the sustainability of personal income…


The “#1” Retirement Fear

What’s so scary about retirement?  How about the added expenses associated with:

  • Loss of regular income
  • Deteriorating health
  • Losing your independence and needing long-term health care

Hence the #1 retirement fear — living longer than your money…and losing the only means of staving off the many inevitable losses associated with old age.

The only thing scarier than having to dip into your retirement savings to pay for expenses associated with old age (and realizing there’s not enough there to handle it) might be knowing that the majority of Canadian pre-retirees have little or no retirement savings! (StatsCan)

Which begs the next question…

How To Make The MOST Of Your Retirement Experience?

A successful retirement will depend on two things:

1)    Lifetime income limitations

2)    How much your quality of life will be affected by your income limitations

It’s human nature to put things off but like it or not, retirement happens to all of us regardless of how much planning goes into it.  But while there are no guarantees, it IS possible to try to reduce the severity of contingencies that retirement offers.

And according to one industry expert, “there really is one optimal way [to plan for retirement contingencies] and it’s based on mathematical, scientific, and economic fact.” (Tom Hegna, Play Checks and Pay Checks).

That Quintessential Retirement Security

That ONE OPTIMAL WAY to plan for retirement is to secure a means of guaranteed income for life.  Via annuities.

How is this possible?

Because annuities utilize a model that takes advantage of other people’s money (annuitants who die before the full value of their principal is re-paid to them).

Looking at it from the source

Life insurance companies have different ways of ‘hedging’ the financial impact of all their products, including annuity commitments, effectively neutralizing the expense of payouts to clients.  In other words, removing potential risks to an insurance company is what makes annuities self-sustaining for them, and viable for the annuitant.

Looking at it from our perspective

Since the #1 retirement fear is outliving our money, we should look at hedging our risks of living too long (& outliving our money) by acquiring as many income sources as possible, including that optimal “guaranteed” income annuity source.

The Math Behind Retirement

Moshe Milevsky is an Associate Finance Professor at the Schulich School of Business at York University has a great illustration for understanding the concept of a guaranteed income investment…

Milevsky uses the example of his grandmother’s bridge club to “illustrate the benefits of annuitization and longevity insurance.”

To add an element of excitement to their card-playing ritual, five senior ladies agreed to contribute $100 each to a one-year CD paying 5% interest – the intention being that whoever survived the year would split the money.

According to statistics however, there is a 20% chance of passing away at the age of 95.  For the bridge club, this meant that one of them may not survive the year, leaving four surviving friends to split the $525 pot at year-end.  If that were the case, each bridge player would receive $131.25 – a 31.25% investment return.

Let’s run the numbers and isolate the source of the investment…

This first table illustrates the amount of ROI resulting from five investors plus the bank’s contributing interest:


$100 Individual investment
$500 Group investment (5 individuals)
$525 Value of group CD after one year ($500 x 5%)
$131.25 CD value split 4 ways (assuming the death of 1 friend)
$525 / 4 surviving friends


Simple, I know.  But let’s use these numbers to show how an infinite income source uses death (aka, “mortality credits”) to guarantee sustainability.

So, What Are Mortality Credits & Why Are They Important?

By definition, “mortality” means, ‘subject to death’ or ‘death on a large scale.’
Hold that thought…

This next table breaks out the sources of ROI (& introduces “mortality credits”):


$500 Original total investment (5 friends, $100 each)
$25 Total Interest earned from the bank ($500 x 5%)
$525 Value of CD after one year ($500 x 5%)
$131.25 Total return for each of 4 survivors ($525 / 4), assuming 1 death
$31.25 ROI for each survivor ($131.25 – $100 original investment)
$5 Interest contribution from bank (on each original $100)
$26.25 Death contribution from deceased friend ($31.25 – $5)


The thing that guarantees ongoing payments to surviving annuitants is the *death contribution* (“mortality credits”) of deceased annuitants.  This money is credited to the survivor’s account…and tapped into after their own principal is depleted as a result of living too long.

In other words, your guaranteed income is funded by the reallocation of capital and interest forfeited by annuitants who die — THIS income is what augments your ongoing ‘guaranteed income’ payments long after your own original principal has expired.

Therefore, think of “mortality credits” as literal money, credited to the collective pool of surviving annuitants.

The Reality Part

In a nutshell, the options for retirement income fall into three categories:

1)    Savings

2)    Work pension plan

3)    Government pension plan (CPP)

Sadly, the reality is that a significant number of Canadians will be retiring with outstanding debt and very little savings from any of these three resources.  The statistics are real:

  • 62% of pre-retirees are concerned about depleting all of their savings (Ipsos Reid research commissioned by CIA, 2010)
  • 63% of Canadians admit to not having enough money to retire (Harris/Decima interview poll sponsored by CIBC, 2011)
  • Canadians over the age of 65 have the highest insolvency and bankruptcy rates in the country (Vanier Institute for the Family, 2011/12)

The Scary Part

What this means is that, drawing from an already-sparse income pool to repay debt commitments can seriously threaten the quality of life in retirement. Even without debt, keeping up with the cost of living on an fixed budget can be challenging, at best.

And this doesn’t even factor in eventual contingencies like plumbing & household emergencies, vehicle maintenance, and disability setbacks.

THIS is why retirement planning is so critical!

It’s absolutely imperative to make every effort to secure as many income sources as possible for your retirement.  Just because you can’t “see” it now… or “touch” it… or “smell” it… doesn’t mean it doesn’t exist.

Retirement is an inevitability that impacts most of us.
Knowing what to expect, and planning for it, just makes sense.

If an annuity can make a guaranteed financial contribution to your retirement quality of life, it makes sense to look into it.

The Next Step

So how do you make up for lost time with an already-thin budget?

Sometimes all it takes is a fresh pair of eyes to see opportunities.  Maybe an objective third party can “see” things that you can’t.  Or maybe (just maybe) you’re unaware of the options available to you.   In many cases, the best solutions aren’t offered by the banking world so, if this is your source of financial advice, you’re probably missing the boat on retirement options.  Just saying…

It doesn’t have to be a painful or embarrassing experience to call up a professional financial advisor and ask for advice.  It’s what they do.

It’s what WE do.


At the end of the day, a successful retirement is a two-step discovery process:

1)    Knowing what your needs are, and

2)    Knowing how to get there (consider Mr. Money Mustache’s post, Shockingly Simple Math Behind Early Retirement as a must-read starting point)

Your retirement preparation should pro-actively involve these basic steps:

  • Reduce current expenses & spending
  • Identify future expenses 25-30 years down the road (including contingencies)
  • Identify future income sources (pensions; RRSP; investment payouts; etc)

AND… you’ll want to look into the options for insuring yourself against outliving your money!  Yep, annuities.

Remember the tontine example of an annual CD renewal between card-playing friends?  Yes, it’s a rudimentary analogy for the real-world model of funding “guaranteed income” but hopefully it explains the practicality and sustainability of a life-long income source.

Annuities Are The Best Retirement Vehicle
For Making Sure You Don’t Outlive Your Money

If you have questions about annuities or any aspect of retirement planning in general, use the BIG red button to contact us and ask how we can help you.  We love brainstorming ways to improve clients’ finances, and we take confidentiality very seriously in the process.
Go ahead, ask away….


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