Changing Gears – From Accumulation to Decumulation
January 28, 2021
You’ve been diligently stashing away some money from every paycheque, contributing to your RRSP and/or TFSA. Perhaps you have a defined contribution pension or, if you’re one of the lucky ones, the defined benefit version. Whatever your process, when it comes to planning for your retirement, there are two distinct stages – accumulation and decumulation.
The first component and perhaps the easier of the two is the accumulation phase. Typically, this phase happens during your working years and requires you to allocate as much of your funds as possible to an RRSP, TFSA, pension plan or some combination thereof. The objective here is to accumulate assets for your retirement years and can be as simple as making regular deposits to an efficiently diversified portfolio and keeping the fees in check. For many of us, the retirement years approach faster than we thought possible when we were just starting out. Retirement marks the beginning of the ‘decumulation’ phase of our investment strategy. The decumulation phase can be a little more challenging and refers to the stage in life when you’re no longer earning an income from work. The objective here is to use the funds saved during the accumulation years to set up lifetime income sources. However, challenges may arise through a host of different issues, some predictable and others not so much.
Here are a few of those decumulation-stage issues to consider:
Government sources of lifetime income like OAS and CPP
We’re so fortunate to live where we do, knowing that our government will take care of us (to a certain extent) in our retirement years, but you still need to be careful. As a Canadian citizen, you are only eligible for OAS up to a given income level and beyond that there could be a surprise claw back. Make sure that you’re aware of the pitfalls when you’re ready to claim the OAS benefit.
Efficiently drawing down taxable (unregistered), and tax exempt (TFSA) assets while managing a minimum RIF/LIF withdrawal against the marginal tax rate
At a certain age, your RRSP (or pension) will be converted to a RIF (LIF) and you’ll be forced to take taxable income whether you need it or not. If you do not require the income for retirement, it could make sense to continue contributing to a TFSA even in your 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 more challenging now to operate within a low interest-rate environment than it has been for previous generations of Canadians. 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 is worth considering - allocate a few years of retirement income to a low-risk vehicle like money markets (or a high interest savings account), but also keep a mid-term basket for fixed income and a longer-term sleeve for dividend paying equities. 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. That’s just one possible approach worth discussing with your advisor.
Determining whether or not additional sources of income should be tapped into
Like many Canadians, you probably have at least some of your wealth tied to the value of your primary residence, your home. It’s possible to unlock some of this equity through a home equity line of credit (a HELOC); this can act as a bridge in the case of a market correction if generating income from riskier assets.
How to efficiently pass on an inheritance to your heirs
Settlement of an estate can be a lengthy, tricky, expensive and emotionally draining process. A segregated fund can make this easier through potential creditor protection and the ability to seamlessly pass on wealth to your beneficiaries.
Changing gears from a saving strategy during working years to the post-work spending years can be a formidable task but, as always, well-advised planning leads to helpful solutions. Smart choices and taking advantage of the options available to you can lead to a lengthy and fruitful retirement.