The Rugby World Cup produced a thrilling match between Japan and South Africa recently. South Africa were the clear favourites, having been World Cup winners on two occasions, while Japan has never made it past the first pool. Japan trailed for most of the game but had possession in the closing minutes and the opportunity to draw the match by taking a drop goal with a high degree of certainty or keeping possession in the much riskier hope of scoring a try worth more points. Japan chose to keep the ball on the field and with some superb passing secured a try to win the match.

In sports we admire the desire to win and the willingness to risk a loss rather than settle for a draw. For several years we have been concerned that Canadians approaching retirement have been applying the sporting mindset to their retirement planning and are jeopardizing the very things they hold most dear.

The symptoms of this are: a focus on capital growth, when their priority should be income security, and an absence of any clear depletion strategy. The former risks an over reliance on equities to provide income and the latter risks both overspending and running out of money, and underspending which means not fully enjoying the benefits of a lifetime of saving. We address these issues in our recent paper: The Design & Depletion of Retirement Portfolios.

The main conclusions are:

  • Retirees need their portfolios to last longer because they are living longer.
  • Investors put more effort into the accumulation of assets and neglect thinking about an efficient depletion strategy. Commonly used depletion strategies do not maximize income and risk leaving a significant proportion of assets unspent.
  • Retirees who are more efficiently depleting their portfolios can afford to take less risk. Specifically, they can reduce the risk of their income falling below a minimum income level.
  • In an example using historic data, a retiree would have generated 86% more income during retirement compared with a commonly used withdrawal strategy. This equates to a 2% additional annual return over a 30 year accumulation period.
  • Effectively securing retirement income requires planning 7-10 years in advance of retirement.
  • Retirees who are able to cope with some annual fluctuation in income will have a higher income than those who do not. Most retirees can distinguish between a core level of income that should be stable and a more flexible supplementary income.
  • If wealth in retirement is measured in income rather than asset value, there is a simple method applicable to any mix of stocks and bonds to preserve future wealth and efficiently deplete the portfolio.
  • The approach is holistic and embraces government benefits, company pensions as well as individual savings. This requires some initial planning effort beyond what is usually offered to investors.

We are already incorporating some of the findings in our client’s plans and portfolios. For example, we have initiated providing safe withdrawal guidelines to retired clients which are updated on a regular basis. For client’s approaching retirement, we are discussing their retirement income needs in more detail and working to achieve their desired level of income security as soon as possible.