Last August, J.P. Morgan Asset Management released “Retirement By the Numbers,” a report that examined how investors approaching retirement manage their portfolios, their income and their spending.
The report drew on a data base of 23 million 401(k) & IRA accounts. They reviewed the activities of some 31,000 people as they approached or began retirement between 2013-2018. (401(k) and IRA are retirement accounts similar to RRSP & RRIFs).
Research from the report suggested:
a) “De-risking” is common place. Three quarters of retirees reduced their equity exposure after “rolling over their assets from a 401(k) (RRSP) to an IRA (RRIF).
b) Retirees relied on the mandatory minimum withdrawal amounts when determining how much income to draw.
c) Income and spending are highly corelated. Where income amounts were increased (i.e. from social security, pension plans, etc.) spending followed.
The retirees studied in the report shared the following characteristics:
a) Roughly 30% of the subjects received pension or annuity income.
b) The median value of retirement accounts was $110,000.00
c) The median investable assets were estimated to be between $300,000 and $350,000.00 (i.e. balance being held in non-registered accounts).
d) The most common retirement age was between 65-70.
e) Age 66 was the most common age to start receiving Social Security.
The study also recognized the following trends.
First, retirees who waited until the rollover date to “de-risk” (i.e. rebalance their portfolios) needlessly exposed themselves to market volatility and the potential for loss. For example, those re-balancing their portfolios in April 2020 after the COVID pandemic, were still down 5-6% after the markets had recovered a year later. Retirees ought to consider rebalancing portfolios prior their obligatory rollover (age 71).
Second, the majority of retirees were using the RMD-required minimum distribution as a guide for withdrawal amounts versus basing amounts on retirement income needs. Like U.S. IRAs, Canada’s RRIFs are also subject to a minimum withdrawal schedule that increases with age. Retirees relying on the schedule for guidance could limit or see future income amounts reduced.
Finally, 62 year-olds represent the peak year of 9.6 million baby boomers in Canada (and the greatest years of nest egg risk are between the ages of 58-66) Should they retire and de-risk en masse, Canadian equity markets will likely undergo increased downward pressure and volatility. Retirees should consider re-balancing or “annuitizing” while markets are fully valued and prior to an increase in capital gains or interest rates.
NOTE: This blog first appeared in the October 2021 edition of the Capital Partner