The Dial Of Decumulation: A Gradual Transition To Retirement
Retirement
Christine MacDonald
Published December 3, 2023
Decumulation, often described as the transition from accumulating retirement savings to managing those assets during retirement, can indeed be a difficult concept to grasp. The shift from the mindset and habits of diligently building savings to now observing those hard-earned funds gradually decrease as you spend them can be unsettling for many. While the dream of a multi-million-dollar lottery win might flicker in our minds, it’s certainly not a practical strategy for navigating decumulation in retirement.
The Sun Life’s Designed for Savings 2023 Report highlights the significant number of Canadians entering this phase, stating that approximately five million individuals will retire in the coming decade. The report further emphasizes the multiple risks that Capital Accumulation Plan (CAP) members must confront in retirement: longevity risk (the risk of outliving one’s savings), market risk (the volatility of investment markets), sequence of return risk (the impact of investment returns early in retirement), the risk of unexpected expenses, and the ever-present threat of inflation. Their research indicates a clear desire among retirees for professional advice to help them navigate these intricate challenges during their retirement years.
In our previous edition of NAVIGATE, Christine MacDonald, Partner & Advisor at Selectpath Benefits & Financial, eloquently discussed the profound impact of continuous education on retirement and comprehensive financial planning. MacDonald now extends that insightful conversation, delving into the crucial role education plays as advisors grapple with answering a question that resonates deeply with plan members: “What is my number?”
“If more people had a solid understanding of financial literacy, I don’t think we’d see as much stress with people retiring.”
MacDonald emphasizes that many individuals don’t start seriously budgeting for their retirement early enough, suggesting that even beginning five years prior to retirement can be cutting it too close in some situations. “When we consider decumulation, the most immediate observation for us as advisors is often the lack of proactive planning,” she states. “The majority of people postpone this critical process, and unfortunately, they wait too long.”
Echoing this sentiment, Sun Life’s Designed for Savings 2023 Report underscores that individuals frequently delay decumulation planning until retirement is imminent, advocating that members should ideally begin this crucial planning phase in their early to mid-40s.
The significance of pre-planning cannot be overstated. This involves initiating the process as early as possible, thoroughly examining all potential income streams, and meticulously considering the logistical implications of various scenarios that may unfold later in life, including those that might be uncomfortable to contemplate.
While calculating the potential costs of long-term care and ensuring they are adequately covered by retirement savings isn’t a pleasant exercise, it’s an indispensable element of responsible budget planning. Failing to do so can inadvertently place a significant burden on other family members who may not be financially prepared to handle it. This proactive awareness also extends to other healthcare expenses, particularly given that retirees may no longer have access to group medical insurance.
Engaging in thorough pre-planning can lead to a delightful realization: the possibility of retiring several years earlier than initially anticipated. Conversely, a lack of foresight can result in the stark and unwelcome truth that one must continue working for an additional decade beyond their desired retirement age. As MacDonald astutely points out, “Nobody wants to reach 60 and discover they are compelled to work until 70 just to play catch-up.”
Learning is Earning
Retirement doesn’t have to be an abrupt end to your working life. As MacDonald previously shared, “Retirement is a dial, not a switch.” Consistent member education and regularly scheduled learning sessions, tailored to every stage of life, are crucial in effectively managing retirement funds, including the process of drawing retirement income through this gradual “dial” approach.
Different phases of life necessitate different financial strategies, and these stages should be supported by relevant financial education and planning. Whether you’re just embarking on your career journey, are twenty years in with another twenty years ahead, or are on the verge of your final day of work, there are always valuable insights to be gained by evaluating the status of your group savings plans.
With the guidance of an expert advisor, clients can develop a reliable and well-thought-out decumulation strategy. This strategy not only helps prevent an unexpectedly large tax bill but also ensures a comfortable retirement income that adequately supports their desired lifestyle and individual needs.
“When members receive the proper education on how to manage their group retirement plans, they’ll likely be making much better decisions.”
Additional investments (GICs, mutual funds, stocks and bonds, etc.)
Government Benefits
Canada Pension Plan (CPP) or Quebec Pension Plan (QPP)
Old Age Security (OAS)
Slow & Steady Wins the Race
As advisors, we recognize that periods of market volatility and inflation, such as those we’ve been experiencing, can significantly amplify feelings of financial uncertainty. A recent survey by RBC, as reported by Benefits Canada, indicated that nearly half of the 1500 Canadians surveyed are experiencing unprecedented levels of financial stress.
However, MacDonald reminds us of the crucial importance of resisting the urge to “time the market.” Historical data strongly suggests that remaining invested is a strategy that yields positive results over the long term. Sun Life’s Designed for Savings 2023 report supports this, noting that educational campaigns from sponsors emphasizing the value of staying the course during market fluctuations are resonating with members. The report further highlights that the inherent stability and consistency of group plans have encouraged the vast majority of plan members to adhere to their long-term investment strategies.
As advisors, we fully understand the impact of the current economy on purchasing power. We are steadfastly committed to guiding both sponsors and members, helping them prioritize the long-term financial journey over short-term market dips. Our goal is to ensure you have a robust decumulation plan that directly addresses your concerns, thoughtfully accounts for these economic variables, and ultimately provides you with absolute peace of mind.
With the benefits of early planning, diversified income sources, and personalized advice tailored to each stage of your life, Canadians can confidently look forward to a smooth transition into retirement, secure in their financial well-being.
Sources:
Sun Life: Designed for Savings Report, 2023.
Benefits Canada: “Employers play crucial role in supporting employees’ savings amid rising cost of living: expert,” October 2023.
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