Can advisors meet the decumulation crisis?

Fraser Stark sees a massive new risk dimension in Canadians’ retirement plans. The President of the Longevity Retirement Platform at Purpose Financial told WP that retirees’ fixed assets are put under a huge amount of risk by the simple fact that we don’t know how long those retirees will live for.

Stark will be one of the expert speakers at WP's next AdvisorConnect, "Examining the Strategic Planning & Solutions Needed for a Sustainable Retirement." The event will be held tomorrow, November 1, 2023. He plans to raise the significance of this issue with the advisors in attendance.

 “It comes down to the uncertainty of lifespan. I often point out the oldest living Canadian was a woman in Quebec who lived to be 117. The uncertainty created by the posisbiliy of a long lifespan can create a massive financial planning challenge,” Stark says. It’s an issue that has always been around, but one that is so topical right now because people are living longer but retiring around the same time.”

Stark notes that the magic retirement age of 65 continues to hold true in Canada, despite average lifespans for individuals aged 65 and older approaching 87. That means retirees have to live for a longer period of time, on assets earned in the same window of work.

At the same time, defined benefit pension plans are no longer as widely available as they once were. In the late 1970s around half of employees in Canada had a defined benefit pension plan, today that number is around 9% for private sector workers and falling rapidly. 

Finally, retirees are staring down the barrel at inflation. Inflation running even a little bit hot has a painful compounding impact for retirees looking at up to 30 to 40 years in retirement. That’s all the more difficult to face when we consider the possible need for long-term care as retirees pass age 80

Those three factors look like a crisis, Stark says, but thankfully it’s a slow moving crisis that advisors can help prepare their clients for. Both Stark and his co-panellist at the AdvisorConnect, Moshe Milevsky, have been working actively to develop strategies that can account for retirement risk.

Advisors can help manage retirement risk with a range of different structures. Stark notes that tried and true approaches like deferring CPP and Old Age Security benefits can help to effectively purchase more lifetime income. Annuities, too, can help now that their yields have risen significantly. Stark also says that Purpose has developed investment funds capable of managing longevity risk.

The Purpose Longevity Pension Fund, Stark explained, is designed to raise rates over time with variable structures which will see the distribution level raised or lowered each year. It leaves retirees’ assets invested in the market, generating higher income rates than they might receive from an annuity by accepting some variability in year-to-year income rates.  

Stark believes that as advisors work to help their clients face these retirement challenges, they need to avoid the “danger of averages.” Planning for average lifespans and average income needs can leave huge gaps in a retiree’s cashflow picture for those who live past the average, as approximately half will. He notes that as advisors work to meet the unique needs of their clients, the product shelf available to them is growing.

“The toolkit available to advisors is expanding, it’s happening in Canada and around the world,” Stark says. “We’re one of the countries at the forefront of this, addressing decumulation and retirement income. I think some advisors are using these tools already, but many are not yet. I think the sooner [advisors] start using the full toolkit of what’s available the sooner they’ll be able to create great outcomes for their clients.”

To hear more of Fraser Stark’s insights on retirement and decumulation, register for the AdvisorConnect here.