Retirement planning has two equal sides, one in which the focus is saving for retirement (accumulation) and the other in which your focus is managing your spending while in retirement (decumulation). Together they complete the picture of your retirement so extensive planning is required to ensure it’s a picture you want to live with.
As an employer with a group retirement plan, it is likely you sponsor or encourage retirement planning sessions for your employees. Typically, a financial professional provides in-person education sessions regarding the group retirement plan and fields general retirement savings questions from plan members. This is most beneficial for the younger members of the plan and some of the members within 10 years of retirement because the content is mainly focused on the accumulation process and how to maximize savings opportunities.
These sessions do not offer great value to your employees nearing retirement, however, but that should not deter you from continuing to offer these sessions. It’s simply a fact that telling a 60-year-old employee to “just increase contributions a little bit every year “ does not provide value. These employees are beyond the stage in their life where that advice is appropriate. Employees nearing retirement age require different information than employees with a long career ahead of them still. General information regarding CPP and OAS eligibility would be of more interest and value at this point than how much they are “putting away.”
An essential piece of education for employees nearing retirement is defining the decumulation phase and reviewing the available options when they need to turn their retirement savings into income. The decumulation phase is generally more complex than the accumulation phase for one simple reason. In the accumulation phase, market fluctuations and investment risks can be balanced over time, with techniques such as dollar cost averaging. During decumulation, there is far less room for error.
The fear plaguing 61% of retirees is the possibility of running out of money during their retirement, while only 39% fear death., according to a report publish in 2013. A well-structured decumulation strategy can help calm this fear. Knowing these two things, it would seem that decumulation education would be a very valuable session offered by an employer.
Common questions that should be addressed in a decumulation education session are:
- Which registered accounts do I draw on first?
- Is it more beneficial to use RRSPs, TFSAs or non-registered money as my source of income?
This may vary from person to person or be a combination, but it’s definitely something that should be discussed in an education setting.
- What type of income options are available to me?
Registered forms of revenue to fund retirement include defined benefit pension payout, life income funds (LIFs), registered retirement income funds (RRIFs) and annuities. All of these savings vehicles have different nuances and are subject to legislation in regards to how they are taken as income (i.e. percentage allowed) and the taxation involved with that type of vehicle. Employees should know most of these terms before they retire in order to be able to knowledgeably ask a trusted advisor for help.
Recent changes to government benefits have also impacted the options regarding when an individual should draw their CPP benefit, whether it’s better to wait, and how integrating other retirement vehicles is almost as important as choosing the way in which they would like their retirement income to flow.
- How does the sequence of withdrawals impact my retirement?
If an employee begins drawing benefits in their first year of retirement in a down market it can significantly impact the amount available for them to draw on in later years. Two investors could average the same return in their retirement accounts and, if one investor drew funds in a down-market year in their first year of retirement, they could have a drastically different experience than an investor who drew in an up-market year in their first year of retirement.
When you are booking your next employee education session with your group retirement consultant, you may want to consider concentrating the content on the immediate needs of your employees who will be using their retirement income in the next few years. It will likely result in positive feedback from those whose urgency is highest.