The 5 ‘wealth zones’ of decumulation

At the most recent meeting of the Decumulation Institute (see decumulation.ca), consultant Don Ezra unveiled a useful concept called “wealth zones.”

He showed a simple drawing of an ordinary detached home, with a basement, three stories and an attic. The labels he attached to each of these levels is a good way for near-retirees to start thinking about the inevitable transition they’ll have to make from wealth accumulation to wealth decumulation.

In the basement is something Ezra calls pre-annuitized wealth, which are the normal employer DB pensions or government pensions that most people don’t usually view as wealth. But of course once you start to draw down on CPP, OAS or in some cases the GIS, these are sources of regular income that become wealth once they’re in your hands.

The ground floor Ezra terms the essentials zone, although he adds that in some cases this too may actually turn out to be below the surface. The essentials zone refers to a level of wealth that is merely enough to annuitize or support life’s essentials: food, heat and utilities, rent or mortgage, etc. This level of wealth is not really discretionary: you have little choice but to divert the income generated to these unavoidable recurring expenses.

Next up is the lifestyle zone, which is a level of wealth that is sufficient to annuitize or support a lifestyle that includes more discretionary spending, such as entertainment, cable TV, dining out, occasional travel etc. Ezra noted that the lifestyle zone is where most participants in employer-sponsored defined contribution pensions (DC plans) will probably be. (The focus of the Decumulation Institute is employer DC pensions: founder John Por believes that many DC plans are adept at wealth accumulation but need to help members with decumulation or drawing an income from the plans. His clients often lose assets to alternative decumulation services so employers should be motivated to improve decumulation education and by so doing retain assets under administration.)

The third floor Ezra calls the bequest/comfort zone, which will be of interest to most of the country’s wealth managers. These people have more than enough money for their own needs, both necessities and luxuries, and are beginning to think about leaving a legacy for after they are gone: inheritances for their children and immediate family and perhaps friends.

So while those on the first few levels still worry about running out of money before they run out of life, those in the comfort zone are pretty sure that their money will outlive them, and the issue becomes how best to distribute it.

The top floor Ezra calls the endowed zone, which he dubs “la crème de la crème). This is a high level of wealth (think Warren Buffett or Bill Gates) where all the financial needs of the immediate family and next generation are taken care of, and it’s time to think of endowments and philanthropic bequests for the world at large.

Editor at Large Jonathan Chevreau runs the Financial Independence Hub and can be reached at [email protected]

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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