Decumulation

Posted by Steve Roper February 4, 2018 | 0 Comments

Fred Vettese is chief actuary with Morneau Shepell, a leading Canadian human resources and retirement plan administration firm. He has written three books on financial retirement strategy. He is someone whom I have read as I near what other term retirement age and I think about. Whether or not I will actually retire is another issue but understanding how to manage money is important to me since I have always been self-employed and I need to take care of Yim and myself.

Here’s a phrase I love… Decumulation. And some words on that by Mr. Vitesse.

“We call it decumulation. It’s all about how you spend down, or draw down your savings in the most efficient manner. You might think this is a lot easier than saving money in the first place, but it’s not.”

Mr. Vettese says his views on retirement strategy run counter to most of the advice seniors hear from their advisors, although they jibe with the current thinking of academics.

For instance, Mr. Vettese favours deferring Canada Pension to age 70, rather than taking it at 65. It might be a better idea to use RRSPs at the beginning of retirement instead, he says. This is something I also agree with which is why I am writing this post.

Canada Pension Plan payments are “at least 42 per cent higher – for technical reasons it ends up being almost 50 per cent higher – at age 70 than it would be at 65,” Mr. Vettese says.

Using the money within your RRSPs first reduces the risk, and as you grow older, the higher CPP provides a safer income stream.

“Your RRSPs are the most variable part of your money. The return on any given year, if you have 50/50 asset mix, can be as low as minus 10 per cent or as high as plus 15 per cent. Over 10 years you can have as low as 0 per cent or as high as 8 or 9 or 10 per cent. You can take out most of the variability if you spend down that money first and have the safe money afterward.”

Seniors are also faced with changing economic factors that challenge accepted assumptions. Old guidelines that proposed a much lower equity percentage in an investment portfolio to minimize risk for older investors may not apply any more.

“The more classic idea that bonds are there for stability and safety – that’s kind of out of the window because interest rates are so low, there’s actually a lot of risk with bonds right now,” says Mr. Vettese.

“The conclusion was you probably can, or should, take a bit more risk these days by investing more heavily in equities than would have been the case historically.”

Mr. Vettese has reservations about financial advisors, especially the way they are remunerated. He says he would like to see robo-advisors, web-based financial services which use algorithms to manage and balance investment portfolios based on inputs from clients, take on the challenge of serving the retired with products geared to their specific financial circumstances.

Until that happens, Mr. Vettese recommends that seniors still consult a financial advisor to work on their financial and investment plans. As do I. Take this article in with you 🙂

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