Accumulation and Decumulation – Preparing your Clients for Retirement

Your client has been diligently putting some money away for their retirement, contributing to their RRSP or their TFSA. Perhaps they even have a defined contribution pension or, if they are lucky, the defined benefit version. In either case, there are two very distinct stages within the retirement planning rubric that your client should be aware of.

As you are aware, the accumulation phase is typically the easier of the two and occurs during your client’s working years – this is where they try to allocate as much as possible to an RRSP, TFSA, pension plan or some combination thereof. The main objective here is to accumulate assets for retirement and can be as simple as making regular deposits to an efficiently diversified portfolio and keeping fees in check. Straightforward, right?

The decumulation phase is a little more challenging and refers to the stage in your client’s life when they are no longer earning income from work. During this stage, the main objective is to use the funds that were saved or accumulated to set up income sources for the remainder of their lifetime. The challenge arises through a host of different issues, some predictable and others not so much.

Issues for your client to consider in regards to the decumulation phase include:

Government sources of lifetime income like OAS and CPP

The Canadian government will take care of us in retirement to a certain extent, but your client should still be careful. Make sure to let them know that for OAS Canadian citizens are only eligible up to a given income level and beyond that, there could be a surprise claw back.

Efficiently drawing down taxable (unregistered), and tax exempt (TFSA) assets while managing a minimum RIF/LIF withdrawal against the marginal tax rate

Yes, that’s a mouthful. However, at a certain age your client’s RRSP (or pension), will be converted into a RIF (LIF) and they will be forced to take taxable income whether they need it or not. If your client does not need the income for retirement, it may make sense for you to recommend that your client continues to contribute to a TFSA, even during those decumulation years.

Managing risks like market returns, inflation and life expectancy

This is the one area where uncertainty prevails and prudence is key. It is far more challenging now than it has been for previous generations of Canadians to operate within a low interest-rate environment. In our decumulation years, we seek to reduce volatility and generate income, but it can be hard to generate meaningful income in a low interest-rate environment without taking on more risk. A staggered approach may be worth considering for your client – they can do this by allocating a few years of their retirement income to a low-risk vehicle like money markets (or a HISA) and keep a mid-term basket for fixed income and a longer-term sleeve for dividend-paying equities. Your client can use the money market portion to draw income for a few years and then rotate the fixed-income portion to money market and some of the dividend-paying equities to the fixed-income basket. Rinse and repeat.

Determining whether or not additional sources of income should be tapped into

Like so many Canadians, your client probably has at least some of their wealth tied to the value of their primary residence. It is possible to unlock some of this equity through a HELOC; this can serve to act as a bridge in the case of a market correction if generating income from riskier assets.

How your client can efficiently transfer an inheritance their heirs

You know the score. Settlement of an estate can be a lengthy, tricky, expensive and emotionally draining process. A segregated fund can make it easier for your client through potential creditor protection and the ability to seamlessly pass on wealth to their beneficiaries.

Changing gears from a saving strategy during working years to the post-work spending years can be a formidable task for anyone. However, you can simplify this process for your clients by providing your informed and expert advance-planning advice, making a lengthy and fruitful retirement a reality for your client.

For more information about the accumulation and decumulation process, contact your local PPI office.

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