As clients approach retirement, they and their advisors need to switch their mindsets from asset accumulation to de-accumulation, according to Peter Drake, vice president, retirement and economic research, Fidelity Investment Canada.
“Most advisors spend their careers helping clients accumulate assets,” said Drake, who spoke Tuesday at the Canadian Institute of Financial Planners (CIFPs) annual conference in Niagara Falls, Ont. “Now they have to think of income in retirement.”
This change in perception may be easier said than done for clients in particular because they will have to adjust their ideas about what a regular income, or retirement “paycheque,” looks like.
Clients want a “paycheque” that is predictable and consistent, said Drake. But with the current volatile market environment and a broad corporate retreat from defined benefit pension plans that promise to pay a set benefit upon retirement, the level of the client’s retirement income is becoming more difficult to predict.
Drake said that a growing number of clients will rely on defined contribution pension plans, which do not guarantee a specific benefit. As a result, they will likely need to pull income from other sources, such as registered and non-registered accounts, employment income and possibly an inheritance or life annuity.
With clients’ retirement income coming from many different sources, they are also going to have to change their ideas about how the paycheque is delivered. Instead of receiving income once a week or bi-weekly, said Drake, clients will need to get used to receiving money in different amounts and times throughout the month or year.
As well, despite clients wanting consistency in their retirement income, Drake said advisors need to be clear that the traditional rule of thumb of a 4% withdrawal rate from a nest egg in retirement may not be viable. Instead, clients may have to deal with a lower payout in some years.