Although you don’t have to spend like a rap star, at some point you’ll have to start dip­ping into the piggy bank

ZOOMER Magazine - - CON­TENTS - By Gor­don Pape

Money How to start dip­ping into your re­tire­ment sav­ings

DE­CU­MU­LA­TION. It’s a word that’s un­fa­mil­iar to most peo­ple, but one ev­ery re­tiree has to live with. How well you cope will go a long way to de­ter­min­ing how happy you feel about those post-earn­ing years.

De­cu­mu­la­tion is the stage in life when you stop ac­cu­mu­lat­ing as­sets and be­gin to un­wind them. Home­own­ers who de­cide to down­size to a condo or apart­ment are a prime ex­am­ple.

When it comes to money, de­cu­mu­la­tion is the point at which you stop sav­ing and start spend­ing your nest egg. For ex­am­ple, reg­is­tered re­tire­ment sav­ings plans (RRSPs) rep­re­sent your ac­cu­mu­la­tion phase – you’re try­ing to ac­cu­mu­late as much cap­i­tal as pos­si­ble to fund your re­tire­ment years. When you make the switch to a reg­is­tered re­tire­ment in- come fund (RRIF), you’re mov­ing into the de­cu­mu­la­tion phase. Now all the money you saved is be­ing with­drawn on a pe­ri­odic ba­sis to help pay for your post-ca­reer life­style.

The As­so­ci­a­tion of Cana­dian Pen­sion Man­age­ment (ACPM) calls de­cu­mu­la­tion “the next crit­i­cal fron­tier.” It re­cently pub­lished a re­port say­ing that more needs to be done to pro­vide sup­port for peo­ple who have moved from cap­i­tal ap­pre­ci­a­tion plans (CAP) to the de­cu­mu­la­tion stage. CAPs in­clude de­fined con­tri­bu­tion pen­sion plans, group RRSPs, de­ferred profit shar­ing plans and var­i­ous non­reg­is­tered ar­range­ments. De­fined ben­e­fit pen­sion plans, which guar­an­tee an in­come at re­tire­ment that is typ­i­cally based on a com­bi­na­tion of salary and years of ser­vice, are not in­cluded.

The as­so­ci­a­tion es­ti­mates that about 2.6 mil­lion Cana­di­ans are mem­bers of de­fined con­tri­bu­tion pen­sion plans or group RRSPs, nei­ther of which guar­an­tees a spe­cific level of in­come at re­tire­ment. Many of these peo­ple re­ceive vary­ing de­grees of fi­nan­cial guid­ance while they are in the ac­cu­mu­la­tion stage. How­ever, this sup­port typ­i­cally ends when they re­tire and en­ter the de­cu­mu­la­tion phase, leav­ing them adrift at a time when they have to make key de­ci­sions on es­ti­mat­ing their life­span and de­cid­ing how much money to draw down each year.

“We be­lieve that the de­cu­mu­la­tion chal­lenges fac­ing cur­rent and fu­ture re­tirees are sig­nif­i­cant and this is­sue should be a pri­or­ity for gov­ern­ments as well as the en­tire re­tire­ment in­come in­dus­try,” says Michel Jal­bert, chair of the ACPM board.

The re­port points out that peo­ple without a guar­an­teed de­fined ben­e­fit pen­sion plan are pretty much on their own when it comes to cop­ing fi­nan­cially. The au­thors would like to see sys­tems put into place that pool in­vest­ment and longevity risks, re­al­ize economies of scale by re­duc­ing ad­min­is­tra­tive and in­vest­ment costs, and of­fer easy to un­der­stand in­vest­ment op­tions.

The study es­ti­mates that Cana­di­ans who are left to cope with de­cu­mu­la­tion on their own will end up with re­tire­ment in­come that is 20 to 30 per cent less than the typ­i­cal mem­ber of a de­fined ben­e­fit pen­sion plan will re­ceive.

It calls on gov­ern­ments and em­ploy­ers to take ac­tion to cre­ate na­tional best-prac­tices guide­lines for the de­cu­mu­la­tion of CAP bal­ances. Among other things, these guide­lines should be de­signed to min­i­mize or elim­i­nate con­flicts of in­ter­est on the part of ad­vis­ers and re­quire full trans­parency when it comes to costs and risks.

As well, gov­ern­ments are urged

to amend leg­is­la­tion to en­cour­age more peo­ple to pur­chase de­ferred an­nu­ities and to cre­ate pooled de­cu­mu­la­tion plans that would re­duce per­sonal risk.

“Right now an­nu­ities can only be de­ferred to age 71, which is also the max­i­mum age for start­ing to draw re­tire­ment in­come,” says Kathryn Bush, a part­ner at Blakes LLP and the chair of the na­tional pol­icy com­mit­tee of ACPM. “We think de­ferred an­nu­ities could pro­tect re­tirees against longevity risk and urge changes to the tax act to per­mit them be­yond 71.”

These are use­ful ideas and they are start­ing to get some at­ten­tion at se­nior lev­els. The Cana­dian As­so­ci­a­tion of Pen­sion Su­per­vi­sory Author­i­ties (CAPSA), which com­prises the fed­eral and nine pro­vin­cial pen­sion reg­u­la­tors, has struck a work­ing group to ex­am­ine the whole is­sue. The fed­eral and On­tario gov­ern­ments have also ex­pressed in­ter­est, says Ms. Bush. You can read the full re­port at

But de­spite grow­ing aware­ness, it will prob­a­bly be some time be­fore we see any changes in the cur­rent sys­tem. So what can you do right now to en­sure you’ ll be able to feel good about your re­tire­ment in the de­cu­mu­la­tion stage? Here are five sug­ges­tions.

Don’t with­draw more money than you need

Cre­ate a bud­get that es­ti­mates how much money you’ll need each year to main­tain your life­style. Cal­cu­late how much you’ll re­quire af­ter tak­ing into ac­count CPP, OAS, and any other sources of in­come you have. The dif­fer­ence will be the amount you need from your RRIF, LIF, de­fined con­tri­bu­tion pen­sion plan or what­ever CAP plan you have.

Re­duce in­vest­ment risk

One of the main con­cerns of the ACPM re­port is in­vest­ment risk. Years of sav­ings could be dec­i­mated by a stock mar­ket crash of the 2008 va­ri­ety. Since you can’t pool your risk with oth­ers at this point, re­duce it by in­creas- ing the pro­por­tion of fixed-in­come se­cu­ri­ties in your ac­count (bonds, GICs, etc.). They don’t pay a lot but if the stock mar­ket plunges you’ll be glad you own them.

Re­duce your costs. This is not easy if you aren’t part of a group plan. But there may be cost sav­ings by mov­ing to a fee-based ac­count, which gives you ac­cess to low-cost F series mu­tual funds and com­mis­sion-fee trades. Ask your fi­nan­cial ad­viser for a quote. The more money you have in­vested, the lower the fee should be.

Have a cash re­serve Don’t put your­self in a po­si­tion of hav­ing to sell se­cu­ri­ties in a fall­ing mar­ket be­cause you need money. Main­tain a cash re­serve equiv­a­lent to at least one full year of with­drawals.

Move to an an­nu­ity in later years You can elim­i­nate longevity risk (the risk of out­liv­ing your money) by switch­ing some or all of your as­sets to a life an­nu­ity af­ter age 87. That’s the point at which the min­i­mum with­drawal sched­ule starts to de­plete the money in a RRIF/LIF at an ex­tremely rapid rate. The min­i­mum with­drawal at 88 is 10.21 per cent and it in­creases an­nu­ally to 20 per cent at 95 and older. If you’re for­tu­nate enough to live that long there is a real risk the cash will be gone be­fore you are. An an­nu­ity will pre­vent that. You can’t trans­fer money di­rectly from a RRIF to an an­nu­ity but you can with­draw an ex­cess amount and use that money to pur­chase one. You can claim an off­set­ting de­duc­tion at line 232 on the tax re­turn.

Some day, we may have a na­tional pro­gram that en­ables Cana­di­ans to re­duce risks and costs in re­tire­ment. In the mean­time, you’re on your own but if you fol­low my sug­ges­tions you should do just fine and en­joy a feel-good re­tire­ment.

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