Although you don’t have to spend like a rap star, at some point you’ll have to start dipping into the piggy bank. Here, how to spend wisely from 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 income 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 Now all the money you saved is being withdrawn on a periodic basis to help pay for your post-career lifestyle.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 non-registered 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.
1. 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.
2. 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 increasing 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.
3. 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.
4. Have a cash reserve