Most decumulation strategies fall short when investment returns are poor

TORONTO, Nov. 29, 2016

TORONTO, Nov. 29, 2016 /CNW/ - Typical strategies for drawing down one's life savings in retirement fail badly when confronted with a worst-case investment scenario. This is according to Fred Vettese, Chief Actuary at Morneau Shepell (TSX: MSI), the largest company in Canada offering human resources consulting and outsourcing services. Vettese uses Monte Carlo simulations to show the serious failings of conventional beliefs in the current issue of Vision, the Company's newsletter that provides in-depth analysis of a major pension or benefits issue of long-term significance.

"Most people believe that Canada/Quebec Pension Plan payments should start immediately, that annuities are unattractive in this low-interest environment and that total pension income needs to rise with inflation every year," explains Vettese. "Our worst-case investment scenario shows that such an approach leads to ruin."

The Vision newsletter gives the example of a retiring couple who spend all of their retirement savings by age 75 through following accepted wisdom. It goes on to describe an alternative decumulation strategy, which allows the same couple to maintain their quality of life until well into their 90s without saving more or having better investment results.

"The problem is that most retirees are unlikely to stumble on the optimal strategy on their own," says Vettese. "The sponsors of defined contribution pension plans can do more to help at the point of retirement."

Vettese also notes that it is not entirely the plan sponsor's fault for not helping more. "In most provinces, including Ontario, the regulations that would permit an intelligent decumulation strategy from a DC pension plan are not yet fully in place. The time has come to take action."

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