Baby Boomers Shifting to Retirement Fund Decumlation C.D.Howe Report – August 16, 2012

CFN – Retiring babyboomers are driving a shift from retirement-fund accumulation to decumulation, but they need better choices to protect against longevity risk, according to a report released today by the C.D. Howe Institute. In “Annuities and Your Nest Egg: Reforms to Promote Optimal Annuitization of Retirement Capital,” the University of Calgary’s Norma Nielson says to enhance retirees’ options, policy reforms should level the playing field for annuity products and promote  market-driven variety of choice, thus ensuring retirees  have at least some funds  available to them for the long haul.

“During this life phase, important choices must be made about how much cash we need to live on in the near term, and how long we should make our savings last, taking increased life expectancy into account,” said Dr. Nielson. “We need an enhanced, efficient annuity market with diverse products to deal with that risk.”

Dr. Nielson, who is Chair in Insurance and Risk Management at the Haskayne School of Business, provides a groundbreaking, comprehensive look at annuity markets in Canada and abroad and explores ways to improve Canada’s current system of law and regulation. Among her findings:

  • Very few of those Canadians without workplace defined-benefit coverage currently choose to annuitize even a portion of their lump-sum savings in retirement – and as cohorts with lower levels of DB coverage enter retirement the proportion of retirees without annuity-based longevity protection is likely to increase.
  • While people in the lowest income brackets already do receive most of their retirement income from government sources (which are a form of annuity), most individuals with middle incomes and higher would likely benefit from placing a portion of their private savings into a life annuity product.

Policy changes should improve the “infrastructure” for decumulation products by gathering high-quality mortality data and ensuring access to that data for annuity pricing, she finds.  Policy should also provide the proverbial level playing field by integrating insurance, banking, pension, and tax regulations so these are neutral factors in the consumer decision to annuitize.  Other reforms should enhance the ability of private annuity sellers to offer a range of decumulation products and promote consumer education.

Thoughts my fellow Canucks?  You can post your comments below.

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