From a research perspective, very little is actually known about the post-retirement phase for defined contribution plan members, according to one expert.
A lot of past logic about this phase has been problematic, said Stephen Utkus, principal and director at the Vanguard Center for Investor Research, at the 2018 Defined Contribution Investment Forum in Toronto in September. The idea that there’s a distinct accumulation phase leading up to a specific retirement date, with decumulation immediately following, is far too narrow.
“We already know that this model is flawed. The idea that there is a set retirement date for a household is flawed,” he said. “People engage in all sorts of transitional arrangements as they exit the workforce. Yes, there are those people who work until a retirement date and then after that completely stop work, but they are a minority and they always have been.”
Read: Constructing the glide path to tackle the any market environment
As such, there’s no decumulation phase, said Utkus. Rather there’s a decumulation puzzle.
One piece of the puzzle, as it stands, is that people are spending less of their retirement savings than they can afford to, he said, noting people continue to accumulate further wealth after retirement or, at the very least, they tend to aggressively preserve their wealth.
“Households around the world are spending down their accumulated savings at a much lower rate than they should be under any sort of rational model,” said Utkus.
This behaviour exists regardless of affluence, he said. Research found $3 out of every $10 of income in retirement was saved by wealthier retirees, with a little less saved, closer to $2 for every $10 of income, in more modest households. “People are hoarding their income and not spending it.”
Read: Are target-date funds the best investment option for CAP decumulation?
Also, withdrawals made from accumulated funds tend to be as needed rather than retirees choosing to mimic a steady income stream for their savings. “The dominant behaviour is that people barely touch their financial accounts,” said Utkus.
It can take a while for people to break the saving habit since they’ve been trained to do so during the much longer accumulation phase, he noted.
“Another theory is generalized uncertainty, who knows what will happen to the world,” said Utkus. As well, health risks such as dementia and cognitive decline also become more probable as people get older, making them even more reluctant to part with their cash, he said.
Read: How are different countries tackling decumulation?
“It is really hard to know whether someone will need a lot of extra care for a long time or no help at all before death,” said Utkus. People want to be able to take care of themselves and not burden their families or the state. If they need assistance, they want to be able to take care for it, he said.
“If you get a diagnosis of Parkinsons at 10 o’clock, you need to make an appointment with your financial planner at two o’clock,” said Utkus. “But most financial advisors are not prepared for that conversation.”
Read more stories from the DC Investment Forum