Following the ebbs and flows of the Baby Boomer generation (born between 1947-1964) can be an interesting and insightful experience whether you are of this generational slice of the workforce pie or not. Baby Boomers continue to be studied, surveyed, and analyzed for their preferences, buying habits, and saving patterns. Regardless of the industry, the behaviours of this demographic makeup of our society simply can't be overlooked and particularly not with 10,000 North American Boomers celebrating their 65th birthday every day for the next 20 years. (Source: Pew Research Center).
In the pension and benefits world, the life event milestones of Boomers demand greater attention and strategic thinking. More focus is being placed on what benefits coverage will be appropriate as well as how to best to draw down on investment income in their post workforce participation world. With decumulation, the question becomes not whether a person saved enough for retirement, but how best to draw down regular income post workforce participation and not run out of money before death. It comes down to balancing acceptable risk versus a sustainable withdrawal rate.
There are various methods to help people draw down on their investment assets. Looking at the cost, risk and flexibility as well as understanding the person's personal preferences related to their finances is important. As this topic heats up, some questions to consider when planning a withdrawal from workforce participation include:
1) Are there any debts that should be paid off so there are no payments taken from retirement income?
2) How much if any of a "rainy day" emergency fund is needed?
3) Are there any funds to be set aside for specific bequests?
4) What other assets should be factored in (e.g. house)?
5) What type of expenses exist and how should they be broken down based on essential (necessary for survival), basic (ability to travel south each winter) and discretionary (like make charitable donations)?
When addressing the decumulation strategy, thought should also be given to one's 1) private pension, 2) government sponsored benefits, 3) any continued workforce participation, 4) taxation, 5) investment costs, interest rates and the rollercoaster ride given by stock markets.
There are several decumulation methods and each varies when it comes to cost, risk, and flexibility associated with them. They include:
1) working with a financial advisor
2) lifetime annuity or term annuity
3) draw down pension and/or target date funds with a decumulation feature
4) home equity release
5) Shifting investments to TFSAs
6) RRSP "meltdown" - making RRSP withdrawals earlier in life if you'll face tax at a lower rate than anticipated in the year of your death.
Increasingly, approaches to addressing decumulation will take center stage where accumulation discussions previously dominated. There is much to unbundle and address on the decumulation topic particularly as it pertains to what can be withdrawn on a tax-free basis and the different age limitations related to annuitizing or converting assets. We invite you to contact us to discuss what decumulation strategies would work best for your corporate pension plan arrangement as well as best practices related to educating your plan members.
We're here to help so you can focus on what you do best.
Dave Dickinson, B.Comm, CFP, CLU, CHFC
Experienced Benefits Specialist ready to optimize your group benefits and pension plans.