It’s a little shocking to realize that 1,100 Canadians are turning 65 every day. Of that number, about 500 will be relying on their own savings for much of their retirement income security (the rest are defined benefit participants or low-income workers). Unfortunately, very few of them are qualified to implement an efficient decumulation strategy on their own. The simple reason is that decumulation is a lot more complicated than it looks.
A 65-year-old couple with $500,000 in tax-sheltered savings could do everything right (if adhering to orthodox retirement planning principles is deemed to be right) and still run out of money by age 75. Alternatively, they could have used a more modern decumulation strategy – one only academics and a select group of actuaries seem to be aware of – and have enough money to live comfortably into their 90s, even if their investment results were no better.
Of course, retirees can and do seek out help from financial advisors but judging from the emails I receive from readers that might not be doing them much good. The interests of commission-based advisors are not well aligned with those of retirees. It’s not just a matter of which investment funds an advisor might recommend (each fund pays a different trailer fee), it’s also a question of whether the advisor is ready to recommend certain risk-mitigation strategies that will drastically reduce his or her compensation going forward.
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Two major stakeholders have the ability to help new retirees but have done little so far. One of them is employers that sponsor capital accumulation plans. I suggested to my insurance company friends that we should mobilize this group to do more. They told me this would be a challenge since few employers want to remain involved with plan participants once they’ve retired, preferring instead to see retiring participants transfer their monies out of workplace plans as soon as possible. This is a shame because employers can provide low-cost decumulation options within their plans. Moreover, they have ready access to objective retirement experts who can devise more effective decumulation strategies.
It should be noted that virtually all such employers are companies in the private sector, companies that should remember why they sponsor a pension plan or group registered retirement savings plan in the first place. Most of them want to see their employees retire with dignity, not only because it’s the right thing to do but also because it sends a signal to the active workforce that the company they work for is a good one and deserves their loyalty.
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In addition, these companies want to be seen as good corporate citizens because a good public image is good for business. Given this rationale, how does it make sense to support participants in defined contribution pensions during a savings accumulation marathon that can last for 30 years or longer, only to drop them just before they reach the finish line? It’s not good for anyone to see a retiree run out of money at age 75.
The other stakeholder that needs to step up is government. Three provinces still do not allow in-plan decumulation. Notably, Ontario is one of them, which is surprising given its very public concern for the retirement security of Ontarians and given that about 200 of those 500 daily retirees live in the province. To my knowledge, the question of allowing in-plan decumulation is not even on Ontario’s radar at present, even though the government had circulated a consultation paper on the subject a couple of years ago (and which now appears to be gathering dust).
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What’s worse, the existing maximum withdrawal rules for defined contribution pension plans may be doing more harm than good in that those rules would preclude some of the more effective decumulation strategies. That particular problem is shared by all provinces.
I should acknowledge that even poor decumulation strategies work fairly well as long as capital markets do well. With the current bull market approaching a record in terms of length, however, that may change sooner rather than later. I have to wonder how many more participants of defined contribution pension plans have to retire with a sub-optimal decumulation strategy before action is taken.