Given the fact that increasing numbers of experts are predicting that retirement could last 30 years – and, given changes in longevity expectations, some are even putting the number at closer to 40 years – drawing down retirement assets is going to involve a considerable degree of delicacy and forethought.
Decumulation is the widely used term financial planners use to describe the process retirees go through as they draw down their assets.
Successful decumulation is the ultimate test of individual risk management since it depends on so many variables, not least of which are these two major ones:
- How will markets perform?
- How long will I live?
As financial journalist Ian McGugan wrote recently in The Globe and Mail: “Spend too much in the early years of your retirement and you may wind up running out of money at 85. Spend too little and you deprive yourself of years of pleasure for no good reason.”
3 Common Mistakes
While the mistakes retirees can make are many and varied when they begin to draw down their financial holdings, three stand out most notably:
1. Taking Canada Pension Plan (CPP) Too Early
As Mr. McGugan points out: “The standard age to start is 65, but every year you put off collecting swells the monthly amount you will collect. Defer to 70 and your payout grows by 42 per cent compared with the amount you would otherwise collect at 65. This, by itself, can go a long way to giving you financial security in your later years.”
2. Paying Excessive Fees
It’s bad enough that the markets are all over the place these days – and likely to remain volatile for the foreseeable future – so it’s even worse if you don’t at least ensure that you’re getting value for money when it comes to the fees you’re paying for financial services and advice. If you’re not using a credit union financial advisor, consider making a switch.
3. No Plan in Place
Not having a plan can be easily rectified and this is where having a credit union financial advisor pays off. It is absolutely vital that you have a strategy in place designed to help you manage the draw down process systematically.
In all these instances, our two credit union partners are ready and able to help you. They can even offer up information and advice on other financial solutions when it comes to optimizing your draw down results – such as these two new federal government options: Variable Payment Life Annuities (VPLA) and Advanced Life Deferred Annuity (ALDA). Read more about them here.
In view of the fact that the assets of most pre-retirees and retirees have taken a hit in the past few months it’s more important than ever that the process of decumulation be considered a critical exercise – one in which sound financial advice plays a key role.
Generally speaking, the withdrawal of retirement assets can be summed up in two rules of thumb:
- Spend down taxable assets first, tax-deferred second, and tax-free last.
- Spend down lower-earning assets first and higher-earning assets next.
If you need help trying to figure out exactly how to strategize the process of decumulation, please contact your credit union financial advisor. It’s part of their job!