At retirement “inflection point” advisors need to think about decumulation

AVP of retirement solutions outlines how advisors can shift focus from accumulation to decumulation as Canada's population ages

At retirement “inflection point” advisors need to think about decumulation

The Canadian population pyramid is getting top heavy. According to Statistics Canada more than 1/5 of Canada’s population is already over 65, that number is projected to grow to 24% through the 2030s.

That’s because baby boomers are aging. The largest and wealthiest generation in Canadian history has now entered their retirement years, and they may be living in retirement for longer than any generation before them. Canadian life expectancy has risen to around 83, and the most recent StatsCan data highlights that individuals aged 65 today can expect to live until they’re 86.

Sylvia Vago sees an inflection point in these statistics. The AVP of retirement solutions at Mackenzie Investments explains that advisors’ primary focus with boomer clients has been the accumulation and preservation of wealth. This demographic shift, she argues, will necessitate a shift in advisors’ approach, to their asset management and their client relationships. Decumulation will play a key role in that approach.  

“As people live longer, and define benefit pension plans decline, retirees are going to have to figure out how they’ll amalgamate all their sources of income and make that last through their lifetime, which could be 30+ more years,” Vago says. “Historically, if someone retires at 65 maybe they’d live to 80 or 85, now they could be living well past 100.

“Advisors have been really good at helping people save for retirement, but once people enter retirement how do you decumulate those assets?”

Vago says that her team at Mackenzie is currently focused on that decumulation question. She highlights the results of a Polaris study which found that around two-thirds of retirees are not sure where their retirement income will come from. That number, which Vago describes as “staggering,” points to the questions retiring Canadians are asking their advisors right now: ‘do I have enough?’ ‘How much will I get?’ and ‘How long is this going to last?’

Accounting for retirement risk

Addressing those questions as an advisor means accounting for three kinds of risk: sequence of returns, inflation, and longevity. Giving a retiree peace of mind means showing them how their portfolio can counteract sequence of returns risk should markets take a short-term dip. It means building an income stream that can match or exceed the rate of inflation. It also means accounting for healthcare costs and the potential for long-term care late in life.

Tax planning around those risks is one area where Vago believes advisors can differentiate themselves. Retirement income can be pulled from so many different streams, with different tax implications, that a tax-efficient decumulation strategy requires a bespoke approach.

Vago added that Mackenzie has developed a decumulation tool advisors can use with their clients, which can show the most efficient ways to decumulate capital. That could mean pulling from RRIFs earlier to defer CPP or focusing initially on non-registered accounts before shifting into TFSAs and RRIFs.

Shifting mentality in retirement

Vago argues that as important as a tax and investment plan is for retirement, it’s one aspect of a much wider picture that requires a mindset shift on the part of both advisors and their clients. That begins with advisors planning for decumulation. She says that in the roughly 5-year period leading to a client’s retirement, as their advisors shift them into less-volatile assets, there needs to be an analysis of what assets should be withdrawn first.

With that analysis there should also be an element of client coaching. Advisors need to talk to their clients on a regular basis, she says, and communicating about what assets are being withdrawn, when, and why. Shifting a client from a saving mindset to a decumulation mindset can be challenging, but regular contact is key to that work.

Advisors also need to work with their clients to determine what they want out of retirement. Not only will a clear discussion around their intentions help with financial planning, it can help manage their expectations. Many clients, Vago notes, will be excited to retire only to find out after a few years that they don’t want to go golfing or boating every day. Talking to them about their values and how they can live them is a key part of an advisor’s retirement planning work.

Cliched as it might be, managing this retirement inflection point means focusing on your clients plans. Vago believes that as mindsets shift from accumulation to efficient and sustainable decumulation, the client’s plan is the most important touchstone.