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One expert says that because people’s retirement plans tend to be unique, so are their decumulation strategies.A/iStockPhoto / Getty Images

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Decades of focusing on helping investors accumulate wealth are in the midst of a reversal as the wave of baby boomer retirement forces advisors toward decumulation, experts say.

More than five million Canadians are going to turn 65 by the end of this decade, according to Eric Monteiro, senior vice president of group retirement services at Sun Life Assurance Co. of Canada. They’re also going to be the first generation of retirees for whom defined-contribution pensions are far more common than defined-benefit plans, he says. That means they’re “truly in the drivers’ seat” when it comes to mapping out their decumulation strategies.

For advisors, the stakes could hardly be higher. That’s because 90 per cent of investors who are aged 65 or older tend to consolidate all of their assets with a single advisor, according to Paul Orlander, executive vice president of individual customers at Canada Life Assurance Co.

“It’s a zero-sum game for advisors,” he says, “because for every advisor who is going to be the net beneficiary and see their assets [under management] grow by being the destination for that client’s consolidation, there’s another advisor or maybe even two who are going to see those assets withdrawn.”

Another challenge advisors face is the sheer complexity of decumulation compared to the relative simplicity of accumulation, for which the goal is simple: growth.

“There is no life stage that’s more complex than the decumulation phase,” Mr. Orlander says.

Most retirees tend to follow a U-shaped spending pattern, in which more money tends to be needed in the early years while they’re still healthy enough to travel and be active, he says. Then, spending usually declines for a period when retirees are still generally healthy, but their mobility starts to become limited. Costs will often rise again in the final years of life as medical treatments and long-term care requirements become more common.

Despite that common thread, Mr. Orlander says “people’s retirement strategies tend to be unique and so their decumulation strategies tend to be unique as well.” That’s especially true given the length of retirement itself is “not as straightforward as it once was.”

Sam Febbraro, executive vice president of advisor services at Investment Planning Counsel Inc. (IPC), says there’s “a bit of a myth that we have to dispel that as soon as someone turns 65, the lights are out and they get into a rocking chair.”

The reality, he says, is that a recent IPC survey shows the majority of investors (56 per cent) want to enter a period of semi-retirement prior to the age of 65 or to continue working at a reduced capacity past that age, at which they’re not yet drawing on their main source of retirement income.

“That tells us the switch to decumulation is not necessarily going to be as rapid as some people may have thought,” Mr. Febbraro says. “We were basing it on what we saw our parents and grandparents do and not what the next generation is planning to do.”

The issue with decumulation and longevity

In addition to dealing with the same set of risks investors face during their accumulation phase, such as market volatility, interest rate trends, and diversification, Canada Life’s Mr. Orlander says there are also other risks that become “sharper” during the decumulation phase, such as longevity.

“What if you live longer than you think? Congratulations, but how are you going to support that?” he says.

Trent Hamans, vice president of private banking and wealth planning at ATB Wealth in Edmonton, knows from direct experience the sort of consequences clients face when their advisors fail to consider longevity risks in their decumulation plans adequately. One example he has encountered in the past is when one partner predeceases another and the surviving spouse takes over the estate.

“It comes as a surprise to many people that as the transition occurs, there can be quite a substantial financial impact,” Mr. Hamans says. “Sometimes, the income of the surviving partner gets to the point at which it’s so large that they’re no longer eligible for certain programs. For example, there might be an [Old Age Security] clawback.”

Handling all the complexities of decumulation strategies will mean evolving the longstanding way advisors have operated, Mr. Febbraro says.

“Many advisors have focused on assets under administration [AUA] and that’s how they delivered their business. It is a mindset that we have had for decades,” he says. “But now they need to become something more like family chief financial officers.”

A culture shift will need to take place to away from an overwhelming focus on AUA, adds Mr. Monteiro of Sun Life.

“Advisors are realizing that clients are starting to say that now’s the time they need to start thinking about how they can draw an income in retirement,” he says. “I’d say the best advisors have started to make that change years ago and most are catching up.”

Next month, Sun Life is set launch the Sun Life One Plan product, which Mr. Monteiro describes as a “much more complete and robust tool” that places more emphasis on decumulation options.

“Historically, most of the calculators and tools available had a real focus on the accumulation side, [but] this allows you to consider things like what happens if you delay [Canada Pension Plan] payments to 71 or what happens if you take it earlier,” he says. “It’s a game changer and it’s dealing with a very complex issue.”

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