Dec. 30: BEST OF THE BLOGOSPHERE

December 30, 2024

Saving for retirement is only half the battle: Brett Millard

While saving, investing and building wealth are key to retiring well, there’s a second factor to consider – drawing down those savings as income when you actually leave paid work.

So writes Brett Millard in Castanet.

Saving is the “accumulation” phase, but drawing down that money, or “decumulation” also requires a lot of thought, he writes.

“Once retirees reach their golden years, a new challenge emerges: how to best withdraw those funds in a sustainable and tax-efficient way. This phase, known as ‘decumulation,’ is just as crucial to a retiree’s financial well-being as the accumulation phase. A well-thought-out decumulation strategy can make the difference between financial security and uncertainty in retirement,” he explains.

After a lifetime of saving in such vehicles as “RRSPs, TFSAs, pension plans and other investment accounts,” it’s important to get decumulation right, he adds.

“Without a proper decumulation plan, retirees risk depleting their savings too quickly, paying more in taxes than necessary and leaving less behind to their loved ones. To maximize the funds available in retirement, Canadian retirees need a thoughtful, carefully managed withdrawal plan that considers taxes, investment growth, longevity, and lifestyle needs,” Millard writes.

He offers up a number of guidelines to help people think through the decumulation process.

• Determine retirement income needs: You need to know how much you are going to be spending once you are retired, he explains, and then budget accordingly. “A thorough budget helps you understand how much income you’ll need each month, setting the foundation for your decumulation plan,” he notes.
• Calculate sustainable withdrawal rates: You want to try and determine how much money you can take out of savings as income per year at a rate that is sustainable, he explains – so that you don’t run out of savings when you are older. Some use the “four per cent” rule, if in doubt consider getting professional advice, he adds.
• Consider tax-efficient withdrawal strategies: “Withdrawing from different accounts in a strategic order can help minimize taxes and extend the life of a portfolio. Generally, but not always, it’s tax-efficient to withdraw from non-registered accounts first, then RRSPs or RRIFs, and finally TFSAs. By delaying RRSP withdrawals, you allow these funds to continue growing tax-deferred. Similarly, keeping withdrawals from TFSAs until last can help protect tax-free income. Again, everyone’s situation is different and a plan should be customized for you,” he writes. Will income-splitting be beneficial to you, tax-wise, he asks.
• Manage longevity and market risk: “Outliving retirement savings is a major concern for retirees and balancing growth with security is a critical part of any decumulation plan. One approach is to keep a mix of assets that allows for growth potential, such as stocks, alongside lower-risk investments like bonds or guaranteed income products,” he warns.
• Evaluate guaranteed income options: Millard says you may want to consider buying an annuity to provide guaranteed lifetime income. “Certain types of guaranteed income products, such as annuities, provide predictable income that isn’t subject to market volatility. While annuities often require an upfront investment, they can ensure a steady stream of income for life, which can reduce stress about market risk and longevity,” he writes. Again, consider getting professional advice to be sure an annuity is right for you.
• Review and adjust regularly: “Retirement circumstances, lifestyle changes, market conditions, and tax laws evolve over time. A regular review—ideally once a year—helps ensure your plan stays aligned with your goals and income needs,” he writes.

“By giving as much focus to decumulation as to accumulation, retirees can enjoy their retirement years with financial freedom and flexibility,” Millard concludes.

If you are a member of the Saskatchewan Pension Plan, you have several decumulation options when you retire. There’s SPP’s stable of annuity options, all of which provide you with a lifetime monthly payment so you can never run out of money. There’s also the Variable Benefit, which provides you with more flexibility in when and how much of your savings you draw down.

Check out SPP today!

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Brett Millard, Castanet

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