A happy retirement isn’t just about having enough money saved up. It’s also about knowing how you’ll manage your nest egg when you get there. These are your spending years, after all — the decumulation phase of your life! What does decumulation actually mean and why does it matter? Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to shed light on this important topic.
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* If you have retired or are about to retire, get ready, your spending years have begun. This is the decumulation phase of your life. But what does that actually mean? And why does it matter?
- Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, joins me now to explain. Alright, decumulation-- sounds fancy. What does it actually mean?
* So it's a term that is really used by industry and advisors to help them distinguish between accounts that are going down in value because there was an unintended consequence or maybe not the portfolio returns you were expecting and the strategic and expected reduction in account values because you're spending it as it was intended to be used.
* You're spending your nest egg.
* You saved, you accumulated it, now you are going to use that money towards your financial goals, towards your retirement objectives. And so we need to distinguish that mindful spending and drawing down of your account values and your assets in order to fund your goals into retirement. So there's a big difference between account values that are declining in value because of poor returns versus what we expect most people will see, intentionally see, is reductions in account values-- that decumulation-- so that you're using those funds towards your goals and your spending in retirement years.
* OK. What is the strategy? And how is it different, maybe, from retirement planning versus the decumulation?
* So I'd say decumulation is a necessary component of your retirement planning. For some people, this might be a distinction without a difference, frankly. But it's really a term that is used to help us focus our attention on the fact that we have finite resources, limited assets and income, and we need to be strategic about how we are spending that-- so decumulating our assets and our income in an intentional way as opposed to the broader question, I'd say, of retirement planning.
* And we'll get more into that intentional way in just a second. So why do you think it's important to have a well-thought-out strategy, and, more importantly, are there things that go wrong if you don't?
* Well, it's important because there are better and worse ways of decumulating. The order in which you draw down on your assets or pull from different income sources can make a big difference in terms of how far your money will go, the sorts of tax consequences that you might be subjected to. We need to be mindful about the spending patterns in retirement.
- So we might be spending a whole bunch of money as soon as we retire-- maybe we're fulfilling some of our bucket list items. Then there might be a little bit of a decrease. And then it might be increasing again for health care or long-term care needs. And so having that mindful approach to the order in which you're pulling the money out will allow it to survive throughout your retirement years.
* And I know also, too, that when you say about things that go wrong-- we talk about income-splitting opportunities with your spouse, but that applies to decumulation too, doesn't it?
* It does. So things that can go wrong, we might, for example, have an Old Age Security, or OAS, clawback that we didn't need to have had we been intentional about how we were pulling out our income. So maybe we had some lower income years that we could have been funding, with, maybe our RRIF, what would have been becoming our RRIF, that we're forced to take. And so being mindful about the order in which we're doing that, or putting assets into the hands of a spouse-- maybe our income-splitting by using a spousal RRSP, for example, we proactively put income that we know is going to be pulled out in retirement into the lower income earning spouse's hands so that we can retain, from a family unit perspective, we are collectively paying less tax.
* And just getting more money, which is important. Let's talk about, if you could, just list out the things that you need to be thinking about. You've alluded to a few in terms of maybe your activity and what you're doing, but what are the things we need to be factoring in?
* Number one, our goal. What is it that we're trying to achieve? How much money do we need to have at our disposal in order to fund the retirement that we want? But then we need to be looking at our assets, and our income sources, and whether or not we have control over when and how we receive those.
- We'd want to be looking at our longevity, how long we expect to live, perhaps our health, our health condition, both current and future, marital status, both current and future. Those are the sorts of things that need to be factored into how and when we're pulling money out. But it can go on as well-- your cash flow needs, whether or not you have obligations for foreign taxes, what your estate planning goals are. So we're looking at the big picture and then really trying to strategically decide how we're doing things, and in which order to get the best results.
* You talked a bit about how sometimes when you order things, it can be making sure you're getting the most. And part of the way of getting the most is paying out the least in tax. So how does that come into consideration?
* So the timing and the order in which we do things is really relevant here. So for the order, for example, are we drawing down on our registered plans first? Are we taking from our non-registered? Maybe we're selling the house before we're doing those things in order to use that to help fund the retirement.
- For other people, we're not going to be selling the house ever. And so we need to be looking at our, whether we're taking from our TFSA, RRSP, RRIF, and in which order. And then the timing of that as well-- as we're coming up to the decision of when and how to take our CPP and our OAS, are there things we could be doing during the years transitioning into retirement, preparing for retirement, to have an overall better net result? And oftentimes, it's a very tiny switch in our thinking, and the timing that we are pulling assets in can make that big difference in the long-term. So OAS, CPP, whether you're receiving pension income, whether or not you're splitting that with your spouse, all of those things should be factored into to get that better tax result.
* And part of this, I think, also, is just talking with somebody, right? Again, we always end this with, but it's true-- talk with an advisor, figure out to help you lay out the strategy.
* Oh, absolutely. This is where I really think the value in modeling out different types of approaches could be running through those "what if" scenarios, and doing that as early as possible into this stage. So if we are thinking about planning for retirement, certainly, by the time we're transitioning into retirement, having conversations with an advisor who can help you really understand the impact of those small decisions that add up will make a big difference.
[MUSIC PLAYING]
- Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, joins me now to explain. Alright, decumulation-- sounds fancy. What does it actually mean?
* So it's a term that is really used by industry and advisors to help them distinguish between accounts that are going down in value because there was an unintended consequence or maybe not the portfolio returns you were expecting and the strategic and expected reduction in account values because you're spending it as it was intended to be used.
* You're spending your nest egg.
* You saved, you accumulated it, now you are going to use that money towards your financial goals, towards your retirement objectives. And so we need to distinguish that mindful spending and drawing down of your account values and your assets in order to fund your goals into retirement. So there's a big difference between account values that are declining in value because of poor returns versus what we expect most people will see, intentionally see, is reductions in account values-- that decumulation-- so that you're using those funds towards your goals and your spending in retirement years.
* OK. What is the strategy? And how is it different, maybe, from retirement planning versus the decumulation?
* So I'd say decumulation is a necessary component of your retirement planning. For some people, this might be a distinction without a difference, frankly. But it's really a term that is used to help us focus our attention on the fact that we have finite resources, limited assets and income, and we need to be strategic about how we are spending that-- so decumulating our assets and our income in an intentional way as opposed to the broader question, I'd say, of retirement planning.
* And we'll get more into that intentional way in just a second. So why do you think it's important to have a well-thought-out strategy, and, more importantly, are there things that go wrong if you don't?
* Well, it's important because there are better and worse ways of decumulating. The order in which you draw down on your assets or pull from different income sources can make a big difference in terms of how far your money will go, the sorts of tax consequences that you might be subjected to. We need to be mindful about the spending patterns in retirement.
- So we might be spending a whole bunch of money as soon as we retire-- maybe we're fulfilling some of our bucket list items. Then there might be a little bit of a decrease. And then it might be increasing again for health care or long-term care needs. And so having that mindful approach to the order in which you're pulling the money out will allow it to survive throughout your retirement years.
* And I know also, too, that when you say about things that go wrong-- we talk about income-splitting opportunities with your spouse, but that applies to decumulation too, doesn't it?
* It does. So things that can go wrong, we might, for example, have an Old Age Security, or OAS, clawback that we didn't need to have had we been intentional about how we were pulling out our income. So maybe we had some lower income years that we could have been funding, with, maybe our RRIF, what would have been becoming our RRIF, that we're forced to take. And so being mindful about the order in which we're doing that, or putting assets into the hands of a spouse-- maybe our income-splitting by using a spousal RRSP, for example, we proactively put income that we know is going to be pulled out in retirement into the lower income earning spouse's hands so that we can retain, from a family unit perspective, we are collectively paying less tax.
* And just getting more money, which is important. Let's talk about, if you could, just list out the things that you need to be thinking about. You've alluded to a few in terms of maybe your activity and what you're doing, but what are the things we need to be factoring in?
* Number one, our goal. What is it that we're trying to achieve? How much money do we need to have at our disposal in order to fund the retirement that we want? But then we need to be looking at our assets, and our income sources, and whether or not we have control over when and how we receive those.
- We'd want to be looking at our longevity, how long we expect to live, perhaps our health, our health condition, both current and future, marital status, both current and future. Those are the sorts of things that need to be factored into how and when we're pulling money out. But it can go on as well-- your cash flow needs, whether or not you have obligations for foreign taxes, what your estate planning goals are. So we're looking at the big picture and then really trying to strategically decide how we're doing things, and in which order to get the best results.
* You talked a bit about how sometimes when you order things, it can be making sure you're getting the most. And part of the way of getting the most is paying out the least in tax. So how does that come into consideration?
* So the timing and the order in which we do things is really relevant here. So for the order, for example, are we drawing down on our registered plans first? Are we taking from our non-registered? Maybe we're selling the house before we're doing those things in order to use that to help fund the retirement.
- For other people, we're not going to be selling the house ever. And so we need to be looking at our, whether we're taking from our TFSA, RRSP, RRIF, and in which order. And then the timing of that as well-- as we're coming up to the decision of when and how to take our CPP and our OAS, are there things we could be doing during the years transitioning into retirement, preparing for retirement, to have an overall better net result? And oftentimes, it's a very tiny switch in our thinking, and the timing that we are pulling assets in can make that big difference in the long-term. So OAS, CPP, whether you're receiving pension income, whether or not you're splitting that with your spouse, all of those things should be factored into to get that better tax result.
* And part of this, I think, also, is just talking with somebody, right? Again, we always end this with, but it's true-- talk with an advisor, figure out to help you lay out the strategy.
* Oh, absolutely. This is where I really think the value in modeling out different types of approaches could be running through those "what if" scenarios, and doing that as early as possible into this stage. So if we are thinking about planning for retirement, certainly, by the time we're transitioning into retirement, having conversations with an advisor who can help you really understand the impact of those small decisions that add up will make a big difference.
[MUSIC PLAYING]