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Tag: decumulation

  • What is Sun Life’s new decumulation product? – MoneySense

    What is Sun Life’s new decumulation product? – MoneySense

    A Canadian retiree’s main decision with this Sun Life product is the age they want the funds to last until (the maturity age). They can choose from 85, 90, 95 or 100 (or select a few with a combination of ages); but they can also start drawing down as early as age 50. Sun Life recalculates the client payments annually, at the start of each year, based on the account’s balance. That has the firm looking at the total amount invested, payment frequency, number of years remaining before the selected maturity age, estimated annual rate of return (expected return is 5.5% but a conservative 4.5% rate is used in the calculations) and any annual applicable regulatory minimums and maximums.

    Birenbaum says holders of MyRetirementIncome can arrange transfers to their bank accounts anywhere from biweekly to annually. While the payment amount isn’t guaranteed, they can expect what Sun Life calls a “steady income” to maturity age, so the payment isn’t expected to change much from year to year. If the client’s circumstances change, they can alter the maturity date or payment frequency at any time. While not available inside registered retirement savings plans (RRSPs), most other account types are accommodated, including registered retirement income funds (RRIFs), life income funds (LIFs), tax-free savings accounts (TFSAs) and open (taxable) accounts.

    Compare the best RRSP rates in Canada

    Emphasis on simplicity and flexibility

    In a telephone interview, Eric Monteiro, Sun Life’s senior vice president of group retirement services, said, in MyRetirementIncome’s initial implementation, most investments will be in RRIFs. He expects that many will use it as one portion of a retirement portfolio, although some may use it 100%. Initial feedback from Canadian advisors, consultants and plan sponsors has been positive, he says, especially about its flexibility and consistency. 

    As said above, unlike life annuities, the return is not guaranteed, but Monteiro says “that’s the only question mark.” Sun Life looked at the competitive landscape and decided to focus on simplicity and flexibility, “precisely because these others did not take off as expected.” The all-in fee management expense ratio (MER) is 2.09% for up to $300,000 in assets, but then it falls to 1.58% beyond that. Monteiro says the fee is “in line with other actively managed products.”

    Birenbaum lists the pros to be simplicity and accessibility, with limited input needed from clients, who “simply decide the age to which” they want funds to last. The residual balance isn’t lost at death but passes onto a named beneficiary or estate. Every year, the target withdrawal amount is calculated based on current market value and time to life expectancy, so drawdowns can be as sustainable as possible. This is helpful if the investor becomes unable to competently manage investments in old age and doesn’t have a trusted power of attorney to assist them. 

    As for cons, Birenbaum says that it’s currently available only to existing Sun Life Group Retirement Plan members. “A single fund may not be optimal for such a huge range of client needs, risk tolerance and time horizons.” In her experience, “clients tend to underestimate life expectancy” leaving them exposed to longevity risk. To her, Sun Life’s approach seems overly simplistic: you “can’t replace a comprehensive financial plan in terms of estimating sustainable level of annual draws with this product.” 

    In short, there is “a high cost for Sun Life doing a bit of math on behalf of clients… This is a way for Sun Life to retain group RRSP savings when their customers retire … to put small accounts on automatic pilot supported by a call centre, and ultimately, a chatbot. For a retiree with no other investments, it’s a simple way to initiate a retirement income.”

    However, “anyone with a great wealth advisor who provides planning as well as investment management can do better than this product,” Birenbaum says. “For those without advisors, a simple low-cost balanced fund or ETF in a discount brokerage will save the client more than 1% a year in fees in exchange for doing a little annual math.”

    Jonathan Chevreau

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  • Which savings should retirees draw down first? – MoneySense

    Which savings should retirees draw down first? – MoneySense

    Working as a financial planner, I am often asked, “What is the most tax-efficient way to draw down on investments?” From the outset, I question if a decumulation plan based on tax efficiency is the best use of someone’s money. I wonder whether it is even possible to design “the best” long-term, tax-efficient withdrawal strategy.  

    I have modelled many different combinations of withdrawal strategies, such as RRSP first, non-registered first, blending the two, depleting registered retirement income funds (RRIFs) by age 90, dividends from a holding company, integrating tax-free savings accounts (TFSAs), and so on. In most cases, there is no significant difference to the estate over a 25- or 30-year retirement period, with the odd exception.

    You may have read articles suggesting the right withdrawal strategy can have a major impact on your retirement. The challenge when reading these articles is you don’t know the underlying assumptions. For example, if the planner is using a 5% annual return, is it all interest income and fully taxable? What is the mix of interest, dividends, foreign dividends, capital gains and turnover rate that makes up the 5% return? There is no standard all planners use, which leads to confusion and can make things seem more complicated than they need to be.

    Think spending, not decumulation

    Here is my approach to designing a decumulation plan. First, think about my opening. You have about 20 years of active living left to get the most out of your money. What do you want to do? Twenty years from now, do you want to look back on your life and say, “I sure was tax-efficient,” or would you rather say, “I had a great time, I did this and that and I helped…” I write this because it is not uncommon for me to see people be too restrictive on their spending in the name of tax efficiency, or not wanting or having the confidence to draw down their investments when they could.

    Stop thinking decumulation; that puts the focus on the money. Instead, think spending. How do you want to spend your money? I know you can’t predict over 20 years, so focus on this year. How can you make this a fantastic year while living within your means? Do you even know the limit to your means? 

    Now prepare an expense sheet so you can see where you are spending your money and where you want to spend it. This is where a financial planner with sophisticated software can help. Have your expenses modelled and projected over time. Will your income and assets support your ideal lifestyle or even allow you to enhance your lifestyle?

    Now do the math

    Once you have a spending plan supported by your income and assets, do the projections showing different withdrawal strategies. You need the spending plan first, because the amount and timing of your spending dictates the withdrawal plan. Plus, detailing your spending gives you a better view behind the curtain to see the impact of spending amounts and frequency on tax and capital changes of different withdrawals. What does spending on things like vehicles, special vacations and renovations mean?

    I suspect that as you work through this exercise, ideally with a planner capable of using sophisticated software, you will see that the withdrawal order doesn’t matter too much and can be easily influenced by various assumptions. If that is your result, you are in a good position. It allows you to manage your affairs so you are tax-efficient each year. 

    Allan Norman, MSc, CFP, CIM

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  • We’re 54, have $4.5 million in savings but don’t know how to withdraw it in retirement. What should we do?

    We’re 54, have $4.5 million in savings but don’t know how to withdraw it in retirement. What should we do?

    My wife and I are both 54 years old and have accumulated a taxable account totaling $2.3 million, and retirement assets totaling $2.2 million. We hope to retire at 55, and we are wondering about the best way to take our distributions. Clearly we will not touch the qualified money until we reach 59½.  

    I understand the 4% rule, but when it comes to taking the money, is it better to have a set monthly, quarterly, or annual withdrawal, or is it better to take a lump sum? I can see myself going crazy trying to time market tops in order to take distributions. I was planning to take money off the table after the peak in 2021. I purposely held out until 2022 for tax purposes and that backfired.  

    Is the best course of action to set it and forget on a monthly, quarterly, or annual basis?

    See: I’m 54 and the primary earner but ‘professionally, I am exhausted’ — we have $2.18 million but what about healthcare?

    Dear reader, 

    You touch on a really common issue retirees have: the distribution phase. 

    For decades, Americans are told to save, save, save for retirement, but then they get to the point where they need to start using the money…and that can be a complicated process. Retirees need to have an idea of how much to withdraw, what that distribution’s impact will be on the rest of their nest egg, what to expect come tax time and how not to use that money too quickly. 

    Like so much in personal finance, the answer to your question is highly dependent on individual circumstances. I’ll get to that in a minute. 

    First, a note about the 4% rule. This rule is meant to be a guideline. For some people, 4% is too much, while for others, it isn’t enough. Experts have argued its applicability, too — Morningstar, for example, said retirees could use a rate of 3.3% and would have a 90% probability of not running out of money in retirement. 

    Want more actionable tips for your retirement savings journey? Read MarketWatch’s “Retirement Hacks” column

    Before you commit to the 4% rule (which, of course, you can always adjust as the years go on), do a few quick calculations on how much you expect to spend in retirement — with a buffer included — and see what the percentage of your total retirement savings actually is. You may be able to retain more in your retirement assets than you expected. 

    If you’re still not sure on how much to take out, perhaps start a bit more conservatively in an effort to preserve your investments. The less money you take out, the more in your accounts that can continue to grow.

    Also, be aware of something called the “sequence of returns” risk, which is when your portfolio value drops too quickly at the beginning of your distribution journey. The result could be less than ideal for your account.

    Read: The Decumulation Drawdown: How spending became the big dilemma in retirement

    Pay attention to the tax implications of your decision, and consider consulting a qualified financial planner and/or an accountant to help you run the numbers. There are plenty of factors you have not included in your letter, such as if any of that money is in Roth accounts, and even then, a qualified financial planner can get into the granular details to help you make the most of your retirement spending and savings. You might find making Roth conversions to be beneficial as your taxable income drops — it’s also a way to avoid required minimum distributions down the road. 

    Also, you’re right not to touch your retirement assets until you’re 59 ½ years old (and for readers who are unaware, that’s when most retirement account assets become available without incurring a penalty). There are exceptions, such as the “55 rule,” which is when you are allowed to withdraw from your retirement account after separation from service if you are 55 or older. The account you can withdraw from must be linked to the job from which you’re separating, and there may be other stipulations attached. Check with your employer about what you are and aren’t allowed to do with your retirement plan. 

    Now, how often to distribute. This will depend on your comfort level, but some advisers suggest pulling six to 12 months’ of monthly expenses in a money-market account and then creating a paycheck effect. “Setting up monthly or biweekly distributions will create the feel of still working and help you stay within your budget,” said Brian Schmehil, a certified financial planner and managing director of wealth management for The Mather Group. 

    Also see: At 55 years old, I will have worked for 30 years — what are the pros and cons of retiring at that age? 

    Make sure the accounts you’re drawing from have shorter investment horizons and are in less risky investments, which will help you “continue to spend what you want to spend and accomplish your goals without having to be overly mindful of market volatility,” Schmehil said. This is in line with the bucket approach, which is when your assets are divided into various investment horizons. The least risky is in your shorter-term “bucket,” whereas the investments with the most risk are earmarked for the long term. 

    Having a monthly distribution schedule might help keep you in check. “I like to use monthly for most people,” said David Haas, a certified financial planner and owner of Cereus Financial Advisors. “It keeps them thinking about a monthly budget if they have a propensity to spend too much.” 

    Keep in mind how many variables can change over the course of your retirement. For example, if you switch up where your retirement money comes from — your taxable account, your retirement accounts, Social Security, etc. — your tax liabilities could change. Also, inflation might have an impact on your spending, or how quickly you draw down your distribution. Your risk tolerance may also transform, especially as you get older and you see your nest egg dwindle or you face market volatility. The frequency in which you take your money might change too, and if it does, that’s OK.

    Readers: Do you have suggestions for this reader? Add them in the comments below.

    Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com

    Source link

  • We’re 54, have $4.5 million in savings but don’t know how to withdraw it in retirement. What should we do?

    We’re 54, have $4.5 million in savings but don’t know how to withdraw it in retirement. What should we do?

    My wife and I are both 54 years old and have accumulated a taxable account totaling $2.3 million, and retirement assets totaling $2.2 million. We hope to retire at 55, and we are wondering about the best way to take our distributions. Clearly we will not touch the qualified money until we reach 59½.  

    I understand the 4% rule, but when it comes to taking the money, is it better to have a set monthly, quarterly, or annual withdrawal, or is it better to take a lump sum? I can see myself going crazy trying to time market tops in order to take distributions. I was planning to take money off the table after the peak in 2021. I purposely held out until 2022 for tax purposes and that backfired.  

    Is the best course of action to set it and forget on a monthly, quarterly, or annual basis?

    See: I’m 54 and the primary earner but ‘professionally, I am exhausted’ — we have $2.18 million but what about healthcare?

    Dear reader, 

    You touch on a really common issue retirees have: the distribution phase. 

    For decades, Americans are told to save, save, save for retirement, but then they get to the point where they need to start using the money…and that can be a complicated process. Retirees need to have an idea of how much to withdraw, what that distribution’s impact will be on the rest of their nest egg, what to expect come tax time and how not to use that money too quickly. 

    Like so much in personal finance, the answer to your question is highly dependent on individual circumstances. I’ll get to that in a minute. 

    First, a note about the 4% rule. This rule is meant to be a guideline. For some people, 4% is too much, while for others, it isn’t enough. Experts have argued its applicability, too — Morningstar, for example, said retirees could use a rate of 3.3% and would have a 90% probability of not running out of money in retirement. 

    Want more actionable tips for your retirement savings journey? Read MarketWatch’s “Retirement Hacks” column

    Before you commit to the 4% rule (which, of course, you can always adjust as the years go on), do a few quick calculations on how much you expect to spend in retirement — with a buffer included — and see what the percentage of your total retirement savings actually is. You may be able to retain more in your retirement assets than you expected. 

    If you’re still not sure on how much to take out, perhaps start a bit more conservatively in an effort to preserve your investments. The less money you take out, the more in your accounts that can continue to grow.

    Also, be aware of something called the “sequence of returns” risk, which is when your portfolio value drops too quickly at the beginning of your distribution journey. The result could be less than ideal for your account.

    Read: The Decumulation Drawdown: How spending became the big dilemma in retirement

    Pay attention to the tax implications of your decision, and consider consulting a qualified financial planner and/or an accountant to help you run the numbers. There are plenty of factors you have not included in your letter, such as if any of that money is in Roth accounts, and even then, a qualified financial planner can get into the granular details to help you make the most of your retirement spending and savings. You might find making Roth conversions to be beneficial as your taxable income drops — it’s also a way to avoid required minimum distributions down the road. 

    Also, you’re right not to touch your retirement assets until you’re 59 ½ years old (and for readers who are unaware, that’s when most retirement account assets become available without incurring a penalty). There are exceptions, such as the “55 rule,” which is when you are allowed to withdraw from your retirement account after separation from service if you are 55 or older. The account you can withdraw from must be linked to the job from which you’re separating, and there may be other stipulations attached. Check with your employer about what you are and aren’t allowed to do with your retirement plan. 

    Now, how often to distribute. This will depend on your comfort level, but some advisers suggest pulling six to 12 months’ of monthly expenses in a money-market account and then creating a paycheck effect. “Setting up monthly or biweekly distributions will create the feel of still working and help you stay within your budget,” said Brian Schmehil, a certified financial planner and managing director of wealth management for The Mather Group. 

    Also see: At 55 years old, I will have worked for 30 years — what are the pros and cons of retiring at that age? 

    Make sure the accounts you’re drawing from have shorter investment horizons and are in less risky investments, which will help you “continue to spend what you want to spend and accomplish your goals without having to be overly mindful of market volatility,” Schmehil said. This is in line with the bucket approach, which is when your assets are divided into various investment horizons. The least risky is in your shorter-term “bucket,” whereas the investments with the most risk are earmarked for the long term. 

    Having a monthly distribution schedule might help keep you in check. “I like to use monthly for most people,” said David Haas, a certified financial planner and owner of Cereus Financial Advisors. “It keeps them thinking about a monthly budget if they have a propensity to spend too much.” 

    Keep in mind how many variables can change over the course of your retirement. For example, if you switch up where your retirement money comes from — your taxable account, your retirement accounts, Social Security, etc. — your tax liabilities could change. Also, inflation might have an impact on your spending, or how quickly you draw down your distribution. Your risk tolerance may also transform, especially as you get older and you see your nest egg dwindle or you face market volatility. The frequency in which you take your money might change too, and if it does, that’s OK.

    Readers: Do you have suggestions for this reader? Add them in the comments below.

    Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com

    Source link