A little bit of knowledge is a dangerous thing.
That’s the point Bonnie-Jean MacDonald, senior research fellow at National Institute of Ageing at Ryerson University and resident scholar at Eckler Ltd., drove home in a session at Benefits Canada‘s Benefits & Pensions Summit in Toronto on Tuesday.
She took the example of one of her friends, Gordon, who’d taken the direction of a professional advisor and started drawing from his Canada Pension Plan at age 60. MacDonald suggested the advice didn’t make sense for a number of reasons. Given his excellent health and likelihood of longevity, the fact that he was still working at a high-paying job as the sole breadwinner his household and his lack of a workplace pension, everything pointed to the prudence of waiting until age 70 to begin taking his CPP, she said.
His high salary means he loses much of his current CPP to taxes, said MacDonald, noting that with his significant savings, he could have easily relied on them and deferred taking his public pension. As a result of taking it early, Gordon will see his only guaranteed, lifetime pension income reduced permanently, which is especially troublesome considering his likelihood of increased lifespan due to his active lifestyle, she added. “He was told by an expert to do something, even though, if he’d tried to come to the better conclusion by himself, he probably would have. When people are told by an expert to do something, they tend to do it, even though it doesn’t make a whole lot of sense to them.”
Read: New report proposes national pooled longevity insurance program
The scenario demonstrates that there’s a real risk in failing to take the specific profile of a person fully into account when charting a course for retirement, MacDonald stressed. “Managing savings in retirement is very complex. Individuals are being asked to manage a pot of money that is going to change in an unknown way, to pay for unknown expenses, over an unknown time horizon. This could be over 30 years, and this all has to be done within the Canadian retirement income system, where changes in decisions and circumstances will actually trigger a complex network or repercussions.”
Looking at multiple possible scenarios is the first step in combating the various risks as people age, according to MacDonald. It’s dangerous to use one scenario as the sole tool in financial planning since there are multiple variables over which an individual has no control, including health shocks, divorce, death of a spouse, longevity, financial markets, involuntary retirement and inflation rates, she said.
“The question then becomes, how do we do financial planning in such a complex system?” she asked. ”Instead of just looking at one future, we look at many alternative futures.” In Gordon’s case, MacDonald suggested that instead of setting up his retirement so he takes out a set amount year over year until he depletes his savings, there could have been a better way.
Read: How are different countries tackling decumulation?
Based on research supported by the Financial Planning Foundation, MacDonald proposed Gordon could take advantage of a variable drawdown strategy whereby a retirees could take out a stable percentage from their overall portfolios that would be subject to changes in financial markets. As such, Gordon’s income would be subject to some shifting throughout the years, but the movement up or down would be prudent and reflective of his current environment. The model is very conservative, however, and would project for the possibility of Gordon living to age 110.
If Gordon wished to be more aggressive, he could divide his savings, using a variable drawdown strategy for half of his assets and using the remainder to live on while he defers his CPP, thus making the guaranteed portion of his retirement income the strongest it could possibly be. ”A conventional determinant financial planning model would not appreciate this because it can’t evaluate the fact that it’s actually controlling the risk he’s facing,” said MacDonald.