Decumulate & Downsize

Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.

Boomers approaching the “Decumulation” Years

Posted By |

My latest blog for MoneySense.ca revisits the topic of Decumulation, a subject to which we gave full column treatment in the print magazine early in the fall. Think of Decumulation as the mirror image of Wealth Accumulation. And of course, here at the Hub we have sections devoted to both.

For one-stop shopping and archival purposes, we’re publishing the blog below as well, with some different subheads, links and the addition of an illustration and a photo of Decumulation Institute founder John Por.

Baby Boomers Word Cloud Concept

By Jonathan Chevreau

With 10,000 American baby boomers turning 65 every day, plus 1,200 Canadian boomers, there is fast approaching a major sea change in how this generation handles their investments.

When you’re working, things are somewhat automatic. Your employer deposits your paycheque into your bank account perhaps every second week, conveniently withholding income taxes at source. Perhaps you’ve automated your savings program and pension contributions.

In short, you are in Wealth Accumulation mode, and so likely is your financial advisor, since he or she is also probably personally in the same mode.

The Decumulation Institute

john's Photo
John Por, Decumulation Institute

But once you turn 65 or cease to draw a full-time salary, you are now in the “Decumulation” zone. We devoted a column to Decumulation in the September issue of MoneySense, in which we highlighted a new undertaking by John Por called the Decumulation Institute.

Last week, I attended the second meeting of this group, which includes Malcolm Hamilton, the retired actuary who continues to be quoted by this magazine and others. Except for John and Malcolm, most of the attendees didn’t wish to be identified or quoted directly.

1,500 Canadians will retire each working day until 2034

In his progress report, Por said that by the year 2022, some $2 trillion in financial assets held by various Canadian financial institutions will be converted into retirement income. Over the next 15 to 20 years, he says 1,500 Canadians will retire each working day. Record keepers on average roll over about 30% of Defined Contribution pension assets at the retirement of the members of those plans.

Por’s research shows that bank-based advisors are “poorly trained in discussing retirement income issues,” in part because of the focus on Wealth Accumulation. Por says a mindshift is required to go from Investments to Income.

From the perspective of individuals preparing for this shift, a number of things have to be considered. These include adjusting lifestyle expectations, considering longevity risk, saving more money, taking more investment risk or simply postponing retirement.

Por has created a website at www.decumulation.ca and begun work on Decumulation Workshops that may help DC pensions, financial advisors or possibly their clients prepare for this transition.

It was Por’s pioneering work on Decumulation that prompted us here at the Financial Independence Hub to include sections on both Wealth Accumulation and Decumulation, as well as Longevity & Aging.

Advisors slow to make the leap?

In my experience, relatively few financial advisors have made this leap. One that comes to mind because he’s written a book about it is Daryl Diamond of Diamond Retirement Planning. The second edition of his book, The Retirement Income Blueprint, expertly maps out the terrain. Rogers Group Financial’s Clay Gillespie is another who has a similar focus.

Both of them are listed in the Getting Help section of the Hub (as is MoneySense’s online directory of fee-only planners). A third, who is also contributing articles on Decumulation for the site, is Doug Dahmer, of Emeritus Retirement Income Specialists in Burlington. He provides a number of tools and even games that let you run “what if” scenarios on life expectancy, inflation, timing of government benefits, tax rates etc.

Jonathan Chevreau is MoneySense’s editor-at-large and recently launched the Financial Independence Hub. (https://findependencehub.com/). He can be reached at jonathan@findependenceday.com

 

The special challenges of retiring from your own business

Posted By |
DelInSuit
Del Chatterson

By Del Chatterson,

Special to the Financial Independence Hub

What, no pension plan? No early retirement package for the owner?

Of course not, you’re an entrepreneur and not dependent on anybody else to look after your welfare. But have you looked at the hard realities of exiting from your business to a comfortable and happy retirement? There are some special challenges.

When you do start looking it’s hard not to be envious of the friends and family on well-funded civil servant or big corporate pension plans. How did you miss that concept? Well, it may be too late now to change career paths, but it’s not too late to plan your exit strategy. Continue Reading…

The Fatal Flaw in Most Retirement Plans

Posted By |

Here at the Hub we make a big distinction between Wealth Accumulation and its mirror image, Decumulation. Decumulation is all about drawing an income from your investments and pensions once you’ve stopped working full-time. The mindset is quite different from working and saving to invest.

We plan to run a number of contributors by guest experts on Decumulation. This is the first of what we hope will be many contributions by certified financial planner Doug Dahmer (pictured), founder and CEO of Emeritus Retirement Income Specialists.

dougdahmer
Doug Dahmer

By Doug Dahmer

Special to the Financial Independence Hub

There is a critical issue that continually arises that people don’t tend to think about when it comes to their retirement planning. I’m not discussing their retirement income requirements, retirement age, accumulated assets, government benefits or even their expected rates of return, though those are all important. What’s often ignored is their life expectancy.

Your life expectancy is probably a more important decision than deciding how close you are to retirement. Yet the latter is what the focus is put upon.  Deciding this critical factor then allows you to consider other important things like where are you going to live and for how long will you live there?  When should you downsize and when should you consider a retirement home?

Also consider your spouse’s life expectancy

Don’t forget to consider the life expectancy of your spouse – the disparity between your two longevities can have even more significant implications to your planning. How should you split incomes and which assets you should draw from first?

Longevity has increased thanks to medical advances and the fact that many boomers have adopted better lifestyles that often allow them to celebrate their 100th birthdays. However,  many variables play a role in how long you may live. These include reducing stress, genetics, eating healthy, exercising and even being married. While we would all agree that living a long life is a good thing, it is important that each individual is prepared for the financial consequences of their longevity.

When Canada set the retirement age, almost a half century ago, at age 65, life expectancy was approximately 72 years old. In a report from Statistics Canada, the average life expectancy for a 65 year old man in 2009 was 83.5 and for a woman it was 86.6. Remember, this is the average, which means over half the population will live longer than this.

As you can’t see into the future, it’s unclear exactly how long you’ll live in retirement; however there are superior ways of estimating  this rather than simply making a guess based on how you feel about yourself on any given day.

The Longevity Game

A fun, easy and free way to accomplish this is to visit The Longevity Game website, courtesy of Northwestern Mutual Life Insurance. By completing the questionnaire, you will receive a life expectancy calculation tailored to you, generated by factors like your levels of stress, lifestyle habits, current health and family history.

In a recent report by the Society of Actuaries entitled ‘Key Findings and Issues: Longevity,’ it has been revealed that more than half the population undervalues their life expectancy. As a result their retirement planning time horizons are much too short.

Preparing for the ‘No Go’ Years

If you overestimate your life expectancy, you’ll leave your heirs with a little bit extra. However, if you underestimate your life expectancy, you could end up running out of money and having inadequate resources to secure your dignity and independence during your ‘No Go Years’.

According to the report from the Society of Actuaries, “As in 2009, retirees say they typically look five years (median) into the future, while pre-retirees typically look 10 years (median) ahead when making important financial decisions.”

For most, a big part of retirement planning is making sure your money lasts as long as you do, so to avoid a fatal flaw in your retirement planning it would be a good idea to start with a better understanding of how long each of your journeys may last.

Doug Dahmer is CEO and founder of Emeritus Retirement Income Specialists, based in Burlington, Ont. 

 

Which investments to draw down first in Decumulation phase?

Posted By |

Objective 283_thumb[1]
Jason Heath
By Jonathan Chevreau

Good piece by fee-for-service planner Jason Heath on the MoneySense website today.  At age 66, “Bob” has reached retirement and has savings in an RRSP and TFSA, as well as a holding company. He normally takes dividends from the holding company, which makes this a bit more complex drawdown problem than normal salaried employees. Heath says the corporation adds flexibility, which I’d agree with. Continue Reading…

Feeling Insecure About Social Security?

Posted By |
Business Pic KD
Kassandra Dasent, More Than Just Money

By Kassandra Dasent,

Special to the Financial Independence Hub

Based on a survey released this year by the TransAmerica Center for Retirement Studies, it appears that the majority of Millennials and Gen Xers believe Social Security will no longer exist by the time they are ready to retire. It’s time to set the record straight about what Americans can realistically expect from Social Security in the coming decades and what they can do to secure their own financial future.

The Truth about Social Security

The truth is Social Security is in need of a fix. Social Security trustees believe the program will still be financially solvent through to 2019. However, if no changes are introduced by 2033, the trust fund will be exhausted. Based on the latest Social Security Trustees’ report, money generated from current payroll taxes at that point are estimated to be enough to support only 77% of promised benefits until the year 2088.

Changes to the Social Security program are required at a congressional level and with the current stalemate in Congress over other political agendas, Social Security has apparently taken a backseat. Congress hasn’t passed any significant ratification to the program since the last reform of 1983.

A public opinion poll sponsored by Voice of the People in February 2014 suggests Americans are willing to make some tough concessions. A representative majority of the public supports measures such as raising the payroll tax rate and the annual cap on income, reducing benefits for top income earners and increasing the full retirement age to 68 or more.

Count Social Security as a Bonus 

It’s important to note Social Security was never intended to serve as a full pension but rather as a supplemental retirement and disability insurance program. The reality is that many Americans rely solely on Social Security payments during the course of their retirement years. Suffice it to say, extreme financial hardships along with poor financial planning are often cited as reasons why some retirees end up with little to no personal savings and investments.

Even though many Americans overwhelmingly disapprove of any potential cuts to Social Security, according to recent Gallop polls, over 69% of those surveyed don’t expect to rely heavily or at all on Social Security payments. These findings mirror my own view in that my plans and calculations for achieving financial independence do not consider Social Security payouts as part of the equation.

As taxpayers, Americans have the right to expect their fair share from Social Security during their golden years but considering that the average Social Security monthly payment is $1,192.21, this amount is likely far from being enough for the vast majority.

Achieve Financial Independence without Social Security

Whether the intent is to leave the workforce earlier than 55 or continue to work well into your golden years for the sheer joy of it, focusing on achieving financial independence is truly a wise option. By saving and investing as much as possible, ideally well above the suggested rate of 10% to 15% of earned income, keeping consumer debt out of the picture while paying off any mortgage debt, spending consciously and living frugally, financial independence is well within reach.

In striving for financial freedom, your future and financial security will never be limited by how much Social Security can afford to pay you. In the event Social Security reforms are enacted and in place by the time you’re eligible to file, you could easily decide to defer filing your claim until 70 years of age, in order to reap even higher benefits.

As the saying goes “Never keep all your [financial] eggs in one basket.”

Kassandra Dasent is a freelance writer, business consultant, wife and step-mom. She is the founder of More Than Just Money, where she discusses a variety of topics and personal experiences that intersect with money. Her articles have been featured on several sites, including US News & World Report, The Globe & Mail and Brighter Life.