One of the greatest challenges facing financial advisors over the next two decades will be helping millions of Canadian baby boomers plan for retirement. Boomers may be the best-educated generation in the country’s history, but they are still vulnerable to making mistakes that could derail their plans for a comfortable retirement.

The most serious error is undoubtedly procrastination, which leads some people to avoid making any plans at all, even when retirement is looming.

“The earlier they start, the better,” says John Crisp, a certified financial planner with Clarica Life Insurance Co. in Victoria who specializes in pre- and post-retirement planning. “Self-employed people should begin by age 45. And everyone should look at it seriously within five years of their planned retirement date.”

Unfortunately, says Carien Jutting, a professional retirement planner with Fiscal Wellness Inc. in Stratford, Ont., many don’t.

“A few years ago, a study by Fidelity Investments Canada Ltd. found that 20% of Canadians who were within five years of retirement had done no planning at all,” says Jutting, who is past president of the Canadian Association of Pre-retirement Planners. “Another 10% had taken only a cursory look at it.”

She defines “basic” retirement planning as calculating the amount of money needed to retire, identifying all sources of income and reviewing beneficiaries to ensure they are current.

The next step is working on “criticals,” which includes creating a post-retirement budget, determining how and when to withdraw funds and examining the tax implications of the decisions made.

Another common mistake is underestimating life expectancy. “People frequently base their estimates on how long their parents lived,” says Jutting. “But actuarial tables indicate that both men and women can expect to live well into their 80s. I suggest that advisors recommend age 90 for life expectancy and tell clients to plan on having a reserve for long-term care.”

Budgeting is another stumbling block, she says. Many people assume their expenses will decline dramatically because they are no longer going out to work. But the decrease may be less than they anticipate, depending on their post-retirement plans and expectations.

“Clients should look at their spending realistically and work backward to determine how much capital is required to create sufficient after-tax income by the projected retirement date,” says Crisp.

He suggests advisors get clients to assess — honestly — how frugal they are (do they want a new car every two or three years?) and how much travelling they intend to do. Clients can talk to retired family members and friends to find out what their experience has been.

It’s the advisor’s job to make sure clients are being realistic, Crisp adds. “If the projected retirement date is unrealistic, based on lifestyle expectations, you have to say so — plainly.”

Budgeting is as easy as creating an Excel spreadsheet, says Jutting. “Take bank statements or bank books and look at where the money goes,” she advises clients. “Determine what’s mandatory and what’s discretionary — things such as recreation, travel and gifts. The latter is a relatively small percentage of the total, but it’s all you can really control.”

And, she reminds clients, remember that everything is paid for with after-tax dollars. “That’s what things really cost, so clients should be very aware of marginal tax rates.”

Advisors should also factor inflation into their calculations when doing projections for clients, says Lucette Simpson, an advisor who specializes in retirement and estate planning with Lanagan Lifestyles Ltd. in Calgary.

“Even moderate increases in the cost of living erode the purchasing power of money over time,” she says. “Since 1975, the average annual inflation rate has been 4.4%. However, we probably won’t see high interest rates anytime soon, so an inflation rate of 3% is realistic.”

Simpson also warns against underestimating the cost of health care after retirement.

“It’s important that advisors understand the provincial benefits available to their clients,” she says. “In Alberta, for instance, the government covers 70% of seniors’ prescription costs. Most prescriptions are covered, and seniors pay a maximum of $25. But you have to apply for this benefit before you turn 65. It’s not automatic.”

Private health-care plans are available to cover dental and eye care, Simpson notes. The question is whether they’re worthwhile. “In some cases, it’s cheaper for the client to self-finance these costs,” she says. “For example, if a plan costs $150 a month and the client only spends $600 annually on dental care and $600 every three years on glasses, he would save $1,000 a year by self-financing.”

@page_break@Longer life expectancies mean there’s a strong probability that, at some point, retired people will need help with everyday activities such as bathing, dressing and eating. The options — a nursing home or home care — are both expensive, with costs as high as $10,000 a month.

“Advisors need to become familiar with long-term care insurance products and educate their clients about them,” says Simpson. “If a client doesn’t have sufficient assets to cover long-term care costs, a long-term care insurance policy may be the solution.”

As for calculating income sources, Crisp contends that the investment industry promotes unrealistic expectations: “I get frustrated when I hear that people are using 10%-12% rates of return over 20 years for RRSPs and RRIFs. That just won’t happen, and it certainly shouldn’t be the base plan. Advisors should underestimate the rate of return clients will get; the more you do so, the better off they’ll be.”

Crisp says that many clients don’t fully understand how the tax system affects their retirement income, either.

“Every dollar you take from a registered account, whether retirement or not, is fully taxable,” he says. “However, non-registered money can be invested in capital investments that produce capital gains, and only 50¢ of every $1 of capital gain is taxed.”

Capital gains also can be set up so clients do not realize any gains while they hold the investment. Secondary real estate properties are a notable example. The gains or losses on the value of the property are not realized until the property is sold or has a deemed disposition, say, due to death.

There is also a mechanism that reduces the taxes payable on Canadian dividend income. If clients receive dividends, usually quarterly, there is a gross-up and a tax credit system that effectively reduces the taxes payable on every $1 of dividend income below that of interest income. This can be an effective retirement income source.

“Every dollar produced from an investment that has special reductions in taxation means fewer investments have to be sold to create retirement income,” Crisp notes.

Perhaps the advisor’s most important responsibility is to address the issue of financial literacy. “Or lack of it,” says Jutting.

Because of the lack of financial literacy, people often make the mistake of assuming investment growth is the same as income. They simply don’t understand the markets, she says.

“At a minimum, advisors should teach their clients how to read statements and investment profiles,” Jutting says. “I’ve been doing portfolio repair for the past four years. And, in talking to clients, I have found that most didn’t have a handle on what their investments consisted of, other than the actual names of the mutual funds.

“They didn’t know how trading bonds work, the differences between stocks and bonds or the risks to which they were exposed,” she says. “Without that information, it’s much more difficult to plan intelligently for life after
retirement.” IE